Clio + Xero: Untangling Credit Notes, VAT Errors, and Interest Invoices

Integrating Clio with Xero brings a lot of efficiency to legal practices, especially for time tracking, billing, and syncing client payments. But when it comes to credit notes, VAT handling, and interest invoices, the sync isn't always as neat as you'd hope.

Here’s what I’ve encountered while managing bookkeeping for a law firm using both platforms — and how we’ve been working through it.

1. Interest Invoices: Watch the Bank Feed

One quirk in the Clio–Xero integration is how interest is handled. When bills are paid late interest on the amount owed starts to accrue.

Instead of being added as line items to existing invoices, Clio pushes interest line items through as separate invoices into Xero. This used to cause reconciliation issues and confusion; especially if interest was already included in payments or communication with the client.

Fix: Ensuring the Xero bank account is correctly connected has largely resolved this issue. Interest invoices are now identifiable and clear, and don’t cause mismatches when the sync is properly set up.

2. Credit Notes + VAT: A rapidly out of hand item

Clio’s credit notes don’t sync cleanly to Xero with consistent VAT treatment. The system can't tell the difference between VAT-inclusive and VAT-exclusive line items. It defaults to the system setting on the Xero account. This can throw off your VAT returns and financial reporting — and in one recent case, we had over 330 credit notes requiring correction.

Here’s how I tackled it:

Locked Financial Year

• Approach: Credit note errors were resolved by issuing corresponding sales invoices to re-align the VAT and sales figures. Since multiple contacts were involved, a Suspense account was used to allocate these correctly, as Xero only allows one contact per sales invoice.

• Outcome: Sales and VAT now correct; credit notes cleared.

Current Financial Year

• Approach: This time, we could remove the incorrect payments and edit the actual credit notes directly.

• Outcome: Sales and VAT now accurate, Xero will update the VAT return correctly in the late payments section.

3. No Perfect Solution — Just the Best-Case Workaround

We reviewed this in a full Clio–Xero Sync Review and flagged the options:

• Set the “Clio credit notes” account to NO VAT, and manually edit 20% VAT cases.

• Or set it to 20% VAT and manually edit the rest.

Neither is perfect, but it’s a matter of choosing the option that minimises manual changes. A full automation fix isn’t available yet... we’ve raised the issue with Clio and are in discussion.

Final Thoughts

Clio and Xero are powerful when used together - but credit note syncs and VAT compliance require extra vigilance. If you’re a bookkeeper working with law firms or managing in-house accounts, don’t assume everything "syncing" = "sorted".

Manual review, thoughtful workarounds, and sometimes a bulk correction strategy are necessary to keep the ledgers clean and the VAT returns accurate.

Need help with a Clio–Xero cleanup?

I’ve been through the trenches with hundreds of credit notes, and I know where the common pitfalls lie. Whether it’s one-off corrections or monthly oversight, please get in touch and I'd be happy to help.