Validation errors: The TaxType code 'OUTPUT2' cannot be used with account code...

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.

A modal dialog box with a light grey background, indicating an error. At the top, there is a large red circle with a white 'X' inside it, signifying an error or a problem. Below the icon, in bold black text, it says "Oops!". Underneath that, the main error message is displayed in dark grey text: "A validation exception occurred (The TaxType code 'INPUT2' cannot be used with account code 'LMB10') Validation errors: The TaxType code 'INPUT2' cannot be used with account code 'LMB10'." At the bottom center of the dialog box, there is a blue button labeled "OK".

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.

A screenshot of the "Chart of accounts" page within an "Advanced accounting" section. At the top, the breadcrumb trail "Advanced accounting > Chart of accounts" is visible. Below that, the main heading is "Chart of accounts". On the right, there's a "Hide Help" link and an 'x' icon. Below the heading, there's a section with introductory text and a graphic. The text reads: "Categorise every transaction in Xero with our full Chart of accounts". Below that: "Financial reports draw on each account to show how your business is performing". And finally: "Learn more about customizing the chart of accounts". Below this introductory section, there are several action buttons: "Add Account", "Add Bank Account", "Print PDF", "Import", and "Export". Further down, there's a tabbed navigation with "All Accounts", "Assets", "Liabilities", "Equity", "Expenses", "Revenue", and "Archive". "All Accounts" is currently selected. There's also a "What's this?" link. Below the tabs, there are more action buttons: "Delete", "Archive", "Change Tax Rate". Next to them, "No accounts selected" is displayed, and a search bar with "LMB" and "Search" buttons. The main part of the screen is a table displaying the chart of accounts. The columns are: a checkbox column, "Code", "Name", "Type", "Tax Rate", and "YTD". The visible rows in the table are: * **LMB1**: "Amazon Sales" (Income from Amazon), "Type: Revenue", "Tax Rate: 20% (VAT on Income)", "YTD: 0.00". * **LMB10**: "Amazon Refunds" (Amazon Refunds), "Type: Revenue", "Tax Rate: 20% (VAT on Income)", "YTD: 0.00". * **LMB2**: "Amazon FBA Inventory Reimbursement" (Compensation received in reimbursement for damaged inventory held in Amazon warehouses.), "Type: Other Income", "Tax Rate: 20% (VAT on Income)", "YTD: 0.00". * **LMB20**: "Amazon Inventory" (Amazon Inventory), "Type: Current Asset", "Tax Rate: No VAT", "YTD: 0.00". A red rectangle highlights the "Type" column, specifically encompassing the values "Revenue", "Revenue", "Other Income", and "Current Asset".

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.

What to do when HMRC are conducting a VAT investigation on your business

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Amazon account and tax rate mappings for UK Non-VAT registered businesses

Amazon account and tax rate mappings for US businesses

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