---
title: How to code VAT correctly in Xero
description: How to code VAT correctly in Xero
---

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1. [Accounting Service](https://help.1stformations.co.uk/accounting-service?hsLang=en-gb)
2. [VAT Registration and Submissions](https://help.1stformations.co.uk/accounting-service/vat-registration-and-submissions?hsLang=en-gb)
3. [VAT on Sales and Purchases](https://help.1stformations.co.uk/accounting-service/vat-registration-and-submissions?hsLang=en-gb#vat-on-sales-and-purchases)

# How to code VAT correctly in Xero

## A guide to using the correct VAT codes in Xero

Using the right Xero VAT code for each transaction is the foundation of an accurate VAT return.

### The codes to know

- **20% Tax on Revenue:** for standard-rated sales
- **Zero Rated Revenue:** for zero-rated sales (the code still needed even though no VAT charged)
- **20% Tax on Purchases:** for standard-rated costs where you hold a valid supplier VAT invoice
- **Zero Rated Purchases:** for costs from a supplier at 0% (train fares, postage)
- **No VAT:** for costs from suppliers that are not VAT-registered, or for outside-the-scope items

### A common mistake

Applying No VAT to a standard-rated purchase saves a few seconds but means the input VAT is permanently lost. Always apply ‘20% Tax on Purchases’ when the supplier's invoice shows VAT charged. You need a valid invoice with the supplier's VAT number to support the claim.

💡 **Good to know:** We configure default VAT codes for each account in your chart of accounts during setup of your Xero account. Selecting the right account code often sets the right VAT code automatically. Flag any transaction where the auto-suggestion does not seem right.

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