Not the most elegant solution, but a working one.
-- temp table var to simulate data
DECLARE @xml_file_item_errors TABLE ( error_reference_uid INT, item_number INT, error_code VARCHAR(5) )
INSERT INTO @xml_file_item_errors
SELECT 1234567, 13579, 'odd' UNION ALL
SELECT 1234567, 2468, 'even'
SELECT xfe.error_reference_uid,
CONVERT ( XML,
( SELECT item_number, error_code
FROM @xml_file_item_errors sub
WHERE sub.error_reference_uid = xfe.error_reference_uid
FOR XML RAW ('Error') )
)
FROM ( SELECT DISTINCT error_reference_uid FROM @xml_file_item_errors ) xfe
FOR XML RAW ('Errors')