When sending a settlement to Xero if you see this error message then it means that you have selected an output based tax rate for an input based account or maybe vice versa.
Which types of account are there?
In Xero there are 5 different Account Class types. Each one can only be assigned certain types of tax rates. The table below shows the 5 account class types:
ASSET
EQUITY
EXPENSE
LIABILITY
REVENUE
If you are using the LMB default accounts then the account class types are shown below:
Account | Account Class Type |
LMB1 Amazon Sales | REVENUE |
LMB2 Amazon FBA Inventory Reimbursement | REVENUE |
LMB3 Amazon Seller Fees | EXPENSE |
LMB4 Amazon FBA Fees | EXPENSE |
LMB5 Amazon Storage Fees | EXPENSE |
LMB6 Amazon Advertising Costs | EXPENSE |
LMB7 Amazon Sales Tax | LIABILITY |
LMB8 Amazon Loans | LIABILITY |
LMB9 Amazon Reserved Balances | ASSET |
LMB10 Amazon Refunds | REVENUE |
LMB20 Amazon Inventory | ASSET |
LMB21 Amazon Cost of Goods Sold | EXPENSE |
LMB30 Shopify Sales | REVENUE |
LMB31 Shopify Refunds | REVENUE |
LMB32 Shopify Shipping | REVENUE |
LMB33 Shopify Shipping Refunds | REVENUE |
LMB34 Shopify Fees | EXPENSE |
LMB35 Shopify Split Month Rollovers | ASSET |
LMB36 Shopify Balances | LIABILITY |
LMB40 eBay Sales | REVENUE |
LMB41 eBay Refunds | REVENUE |
LMB42 eBay Shipping | REVENUE |
LMB43 eBay Shipping Refunds | REVENUE |
LMB44 eBay Fees | EXPENSE |
LMB45 eBay Dispute Reserved Balances | LIABILITY |
LMB46 eBay Split Month Rollovers | ASSET |
LMB47 eBay Sales Tax | LIABILITY |
LMB50 Etsy Sales | REVENUE |
LMB51 Etsy Refunds | REVENUE |
LMB52 Etsy Shipping | REVENUE |
LMB53 Etsy Shipping Refunds | REVENUE |
LMB54 Etsy Fees | EXPENSE |
LMB55 Etsy Reserved Balances | LIABILITY |
LMB56 Etsy Split Month Rollovers | ASSET |
If you're using your own chart of accounts then you can check the account type inside of Xero under Chart of Accounts.
Which tax rates can I use for each account class type?
By default Xero only allows you to use certain tax types with certain account class types. The table below shows this:
UK Tax Rates | Xero Tax Code | Tax Type |
20% (VAT on Income) | OUTPUT2 | REVENUE |
5% (VAT on Income) | RROUTPUT | REVENUE |
Zero Rated Income | ZERORATEDINPUT | REVENUE |
20% (VAT on Expenses) | INPUT2 | EXPENSE |
5% (VAT on Expenses) | RRINPUT | EXPENSE |
Zero Rated Expenses | ZERORATEDOUTPUT | EXPENSE |
Reverse Charge Expenses (20%) | REVERSECHARGES | EXPENSE |
No VAT | NONE | EXPENSE & REVENUE |
How do I fix the issue?
This error occurs when your chosen account does not allow your chosen tax rate.
Taking our screenshot as an example, this user has selected the tax rate INPUT2, which we know now is 20% (VAT on Expenses).
They have assigned this to the account LMB10, which is Amazon Refunds.
The LMB10 Amazon Refunds account is a REVENUE type account so an EXPENSE type tax rate is not valid.
So to resolve this if we change the tax rate to a revenue type such as 20% (VAT on Income) then Xero will accept it.
IMPORTANT - Only change tax rates in the Accounts & Taxes Wizard and NEVER on the Accounts & Taxes Mapping page.