Purchase Invoice Processing Best Practices in Xero

Messy purchase invoice processing leads to late payments, wrong VAT, and noisy month‑ends. Here’s a simple, repeatable Xero workflow we use with UK SMBs to keep bills accurate, approvals quick, and VAT returns clean.

Capture: get every document into Xero

• Use a single intake: Hubdoc or Dext to email/scan all supplier bills into Xero. Avoid mixed inboxes.

• Enforce naming: SupplierName_InvoiceNumber_Date for easy searching.

• Attachments are non‑negotiable: every bill should carry its PDF for audit/VAT evidence.

Approval: who checks what, and when

• Two-step rule for higher-value bills: creator posts draft; approver reviews coding, VAT, due date.

• Approval thresholds: e.g., <£500 finance approves; ≥£500 budget owner approves.

• Check duplicates: match supplier, date, and invoice number to avoid double posting.

Supplier setup and terms

• Set default account code, VAT rate, and payment terms per supplier (e.g., 30 days EOM).

• Record supplier VAT numbers; flag non‑VAT or overseas suppliers to prompt correct treatment.

• Capture bank details securely; change control requires a second person to approve.

Accurate coding every time

• Keep the chart of accounts lean; prefer fewer general “overheads” buckets.

• Use tracking categories (e.g., department, project) consistently for meaningful reporting.

• Capital vs expense: set a simple rule (e.g., >£500 and >1‑year life → fixed asset) and use an “Assets to review” code if unsure.

VAT treatment: common pitfalls

• UK rates: 20%, 5%, 0%, Exempt, No VAT—choose based on the invoice line, not guesswork.

• Overseas SaaS/services: consider reverse charge; no UK VAT charged, but VAT may be due—apply the correct code.

• Mixed-rated invoices: split lines correctly (e.g., zero‑rated books with standard‑rated shipping).

• Motor, subsistence, and gifts: input VAT may be restricted—apply appropriate codes or consult your accountant.

Bank rules vs. purchase bills

• Use bills for anything requiring approval, due dates, or VAT evidence.

• Bank rules are for small, recurring, low‑risk spends without invoices (e.g., bank charges, small subscriptions). Review suggestions—don’t auto-accept blindly.

Payment runs that stay on schedule

• Weekly rhythm: approve drafts, then schedule one payment run (BACS/online banking).

• Use “Awaiting Payment” to batch pay by due date; export a remittance file if your bank supports it.

• Email remittances from Xero after payment; attach missing invoices before marking as paid.

Month‑end checks that prevent surprises

• Aged Payables: look for overdue bills or odd negatives (often duplicates or miss-allocations).

• Unpaid draft bills: clear or delete—don’t leave month‑old drafts lingering.

• Suspense/AMA (“Ask my accountant”): review and recode before closing the month.

• Supplier statements: spot‑check high‑volume suppliers for unmatched items.

Document retention and audit trail

• Every bill with a PDF/image attached in Xero/Hubdoc/Dext.

• Notes on unusual VAT treatments or allocations.

• Lock dates after VAT filing and year‑end to prevent accidental changes.

Common mistakes and quick fixes

• Duplicate posting from email + manual entry Fix: Turn off manual re-entry; rely on capture tool; enable duplicate checks.

• Coding all to “General Expenses” Fix: Create a short coding guide; use supplier defaults; run “Find & Recode.”

• Wrong VAT on overseas SaaS Fix: Apply reverse charge code; add a supplier note to prompt correct treatment.

• Paying from the wrong bank account Fix: Use bank account restrictions and a standard payment run checklist.

Simple weekly workflow you can copy

• Monday: Capture all bills; post to Drafts with attachments.

• Wednesday: Approve drafts; check VAT, terms, duplicates.

• Friday: Run payments for items due within 7 days; email remittances; file documents.

Mini FAQ

• Do I need Dext or Hubdoc? They save time, reduce keying errors, and keep VAT evidence attached—highly recommended.

• Can I auto‑approve bills? Use with caution. Keep approvals for higher‑value or risky suppliers.

• What if a supplier sends statements only? Request itemised invoices; avoid paying from statements alone.

Call to action Want a clean, fast purchase invoice process? We’ll set up your capture tool, supplier defaults, approvals, and payment runs in Xero—so month‑end and VAT just work. Book a free consultation.