GoCardless to Xero UK how to reconcile payouts properly with a clearing account and get VAT on fees right

UK trades firms using Direct Debit love the low admin of GoCardless. The sticking point is usually Xero reconciliation and fee VAT. This step by step guide shows a clean UK setup that balances first time, covers failed payments and refunds, and makes your VAT return accurate.

What you will set up

• A GoCardless clearing bank account in Xero for all Direct Debit receipts
• Fees posted to a GoCardless Fees expense with the correct UK VAT
• Net payouts coded as Transfers to your real bank so everything matches your feed

Prerequisites and official references

• GoCardless for Xero reconciliation overview: https://support.gocardless.com/hc/en-gb/articles/360001282889-How-reconciliation-works-in-GoCardless-for-Xero
• Reconciliation settings screen: https://support.gocardless.com/hc/en-gb/articles/360001286805-Reconciliation-settings-in-GoCardless-for-Xero
• VAT on GoCardless fees for UK merchants: https://support.gocardless.com/hc/en-us/articles/360017280960-VAT-on-fees
• UK pricing and fee structure: https://gocardless.com/pricing/

Step 1 Create two accounts in Xero

1. GoCardless Clearing bank account

• Accounting > Bank accounts > Add bank account > Add it anyway
• Name: GoCardless Clearing (GBP); Type: Bank; Currency: GBP; do not connect a bank feed

2. GoCardless Fees expense account

• Accounting > Chart of accounts > Add Account
• Type Expense; Name GoCardless Fees; Code e.g. 6255
• Default tax rate:
  • VAT registered: 20 percent VAT on Expenses
  • Not VAT registered: No VAT

Step 2 Map the GoCardless for Xero integration

• In GoCardless > Xero settings > Reconciliation settings:
  • Payout bank account: select your real business current account
  • Direct Debit interim account: choose GoCardless Clearing (GBP)
  • Fees account: select GoCardless Fees (the expense you created)
• Save and run a test collection for a small invoice to see the postings

Tip: The interim Direct Debit account must be different from the payout account. If your Direct Debit account balance keeps rising, you likely have not marked the transfer as reconciled there. See support note: https://support.gocardless.com/hc/en-gb/articles/360031669593-Statement-balance-discrepancy-GoCardless-for-Xero

Step 3 Daily and payout workflow

• Customer pays by Direct Debit
  • Xero marks the invoice Paid to GoCardless Clearing for the gross amount
• Fees
  • The integration posts a Spend Money from GoCardless Clearing to GoCardless Fees with VAT where applicable. Attach the monthly GC VAT invoice for audit
• Payout hits your real bank
  • In your bank feed, match the line to the Transfer from GoCardless Clearing
  • In the GoCardless Clearing account, open the matching transfer and Mark as reconciled

Result: Clearing movements per payout = gross receipts minus fees minus transfer to bank equals zero. If not zero, check missing fees or unmatched transfer.

UK VAT on GoCardless fees

• GoCardless has charged UK VAT on fees since 1 September 2020. Treat fees as 20 percent VAT on Expenses when you have a VAT invoice from GoCardless
• Keep the monthly VAT invoice from GoCardless. Your per payout deductions should reconcile to that monthly VAT invoice total
• Reference: VAT on fees policy: https://support.gocardless.com/hc/en-us/articles/360017280960-VAT-on-fees and Legal VAT docs: https://gocardless.com/legal/vat-documents/

Bank rule to save time

• In your real bank account create a rule
  • Condition: Reference contains GOCARDLESS
  • Action: Transfer to GoCardless Clearing (GBP)
• This auto matches payouts so you just approve

Numbers example

• Collected: 600 plus 400 equals 1000 gross to clearing
• Fees: 20 plus 4 VAT equals 24 to GoCardless Fees
• Net payout: 976 hits your bank
• Clearing: plus 1000 minus 24 minus 976 equals 0

Refunds, failures and chargebacks in the UK

• Failed payment reasons are reported by Bacs via ARUDD messages. The most common is insufficient funds
• GoCardless webhooks include cause and reason code e.g. ARUDD 0 so you can retry or contact the customer. Overview: https://gocardless.com/guides/posts/arudd-messages/ and developer webhooks: https://developer.gocardless.com/getting-started/staying-up-to-date-with-webhooks
• Refund before payout
  • Create a Spend Money from GoCardless Clearing to Accounts Receivable for the gross amount and apply it to the invoice or credit note
  • Post any refund fee to GoCardless Fees with VAT if charged
• Chargeback after payout
  • When GC pulls money back from your bank, code that bank line as a Transfer to GoCardless Clearing
  • In Clearing post a Spend Money to Accounts Receivable to reopen the balance, plus a fee line to GoCardless Fees

Troubleshooting checklist

• Payout line not matching: open the GoCardless Xero Reconciliation Report to see the exact items in the payout and any errors: https://support.gocardless.com/hc/en-gb/articles/360001286965-Reconciliation-reports
• Interim account rising: mark the transfer as reconciled in the Direct Debit account: https://support.gocardless.com/hc/en-gb/articles/360031669593-Statement-balance-discrepancy-GoCardless-for-Xero
• VAT on fees missing: ensure your Xero org is UK and the Fees account uses 20 percent VAT on Expenses. Confirm GoCardless has issued a VAT invoice for the period
• Duplicate collections or mixed methods: if a customer pays by card and Direct Debit for the same invoice, tidy duplicates in the Reconciliation Report and adjust your payment options policy

Handy links

• GoCardless for Xero App Store listing: https://apps.xero.com/uk/app/gocardless
• GoCardless pricing UK: https://gocardless.com/pricing/
• UK Bacs timings and payouts: https://support.gocardless.com/hc/en-us/articles/210535689-Bacs-UK-payment-timings and https://support.gocardless.com/hc/en-us/articles/17485089478940-Receiving-a-payout

Short video refresher on Xero bank rec

This beginner friendly walkthrough helps your office team reconcile payouts and transfers with confidence.

Brand cues so your team recognises the tools

Direct Debit basics for your clients

• Always send the secure GoCardless mandate link. Do not ask for bank details by email
• State your advance notice period for collections. Under Bacs rules the default is 10 working days unless agreed otherwise. See GoCardless guidance and your contract

If you want us to publish an equivalent guide for QuickBooks or Sage, or a deeper dive on failed payments automation with Success plus, tell us in the comments.