Getting the hours right is only half the job. If the GST or VAT on the invoice is wrong, you are either short-changing the tax office or overcharging your client, and both create work later. This guide shows how to turn tracked time into a tax-correct invoice in Xero, with worked examples for Australia, the United Kingdom and New Zealand.
The short version
Connect Xero and your tax rates sync across automatically. Track time, create an invoice, and pick the tax rate that matches the work. Hour Cap applies that rate when it pushes the invoice to Xero as a draft. You open the draft, confirm the GST or VAT lines are correct, then authorise and send it yourself. The tax treatment is always reviewed before anything reaches the client.
Why tax rates should live in Xero, not your time tracker
Your Xero organisation already knows your tax setup: whether you are registered, which rates apply, and how zero-rated or exempt supplies are handled. Re-entering that into a separate billing tool is how mistakes creep in. Hour Cap takes the opposite approach. On connect, it syncs your tax rates from Xero alongside your contacts, sold items, revenue accounts, branding themes and tracking categories. The rates you see when invoicing are the rates configured in your own books.
Step 1: Connect Xero and sync your tax rates
On the Team plan or above, connect your Xero organisation from settings. The sync runs once and pulls your tax rates in. OAuth tokens refresh automatically, so the connection stays live without you reconnecting. From this point on, any tax rate you use in Xero is available when you build an invoice from tracked time.
Step 2: Track the billable work
Log time with the timer or enter durations by hand using formats like 1h30m, 1:30 or 1.5. Each entry carries a description and a billable rate, which resolves in order: the project rate first, then the team member's rate, then your organisation default. These are the pre-tax amounts that the GST or VAT rate will be applied to.
Step 3: Create the invoice and choose the tax rate
Build an invoice from the entries you want to bill. Hour Cap assembles the line items using one of four grouping modes, set per organisation: per entry, per project, per date, or per member. Whichever you choose, the descriptions are preserved, joined with a semicolon when entries are combined onto one line. You apply the tax rate that matches the supply, and that rate flows through to Xero on push.
Worked examples by region
Here is how the same ten hours at a 150.00 hourly rate looks once the regional tax rate is applied. The pre-tax subtotal is 1,500.00 in each case.
| Region | Standard rate | Subtotal | Tax | Invoice total |
|---|---|---|---|---|
| Australia (GST) | 10% | 1,500.00 | 150.00 | 1,650.00 |
| United Kingdom (VAT) | 20% | 1,500.00 | 300.00 | 1,800.00 |
| New Zealand (GST) | 15% | 1,500.00 | 225.00 | 1,725.00 |
The maths is simple, but the point is that you do not calculate any of this by hand. You choose the rate, Xero handles the arithmetic, and the totals appear on the draft for you to confirm.
A note on tax-inclusive versus tax-exclusive amounts
Xero lets you set whether line amounts are tax inclusive or tax exclusive on each invoice. This matters: a rate quoted as "150 plus GST" is tax exclusive, while "150 including GST" is tax inclusive and works out to a lower pre-tax figure. Because Hour Cap pushes a draft, you can confirm this setting in Xero before sending, so the client is billed exactly what you intended.
Step 4: Push to Xero as a draft and confirm the tax
When you create the invoice, Hour Cap queues it and pushes it to Xero as a draft. It is never authorised or emailed automatically. This draft step is where you confirm the tax treatment: check that the right GST or VAT rate is on each line, that inclusive versus exclusive is set correctly, and that any zero-rated export work is flagged the way it should be. Only when you are happy do you authorise and send.
Invoice total formula: subtotal + (subtotal × tax rate) = total. For 1,500.00 at 20% VAT that is 1,500.00 + 300.00 = 1,800.00. Hour Cap and Xero do this for you; the draft just lets you check it.
Edge cases worth knowing
- Mixed rates on one invoice: if some lines are standard-rated and others zero-rated, set the rate per line in Xero on the draft before sending.
- Not registered for GST or VAT: use a no-tax rate from Xero so the invoice shows no tax component.
- Cross-border clients: exports of services are often zero-rated. Apply the matching Xero rate on the draft so the treatment is correct for the client's location.
- Retry on failure: if a push fails, the invoice is marked failed with the stored error and can be retried, so a glitch never silently drops the tax detail.
Where this fits
Tax-correct invoicing is the natural next step after you send tracked time to Xero as draft invoices. The same draft-first flow applies when you invoice a retainer period or use tracking categories on each line. For more on the underlying connection, see how Hour Cap pushes time to Xero. To check your margin before you bill, run the project profitability calculator. Ready to bill tax-correct invoices from your hours? The Xero integration is on the Team plan.