I think the problem is that the hashref returned from CGI::Vars() is a tied hashref, which XMLout doesn't seem to like. Making a copy of it as shown below seems to 'avoid' the problem.

#! perl -w
use strict;
use CGI;
use XML::Simple;

my $cgi= new CGI;
my $xs = new XML::Simple();
my $elements = $cgi->Vars();

my %copy = %$elements;
my $xml = $xs->XMLout(\%copy, rootname => 'source');

print $xml;

__DATA__
#output
C:\test>184342 "test=1&fred=bill&something=somethingelse"
'<source fred="bill" something="somethingelse" test="1" />
[download]

Update: Removed redundant use of Data::Dumper.

It wouldn't be Perl if you couldn't do without intermediate variables: my $xml = $xs->XMLout({%{$cgi->Vars()}}, rootname => 'source'); ____________
Makeshifts last the longest.

#!/usr/bin/perl -w
use strict;
use warnings;
use CGI;
use Data::Dumper;
use XML::Simple;
my $cgi = new CGI( { a => 1, b=> 2, source => 3 } );
my $elements = $cgi->Vars();
DOIT();

$elements = {
        'source' => {
               'a' => '1',
               'b' => '2',
           }
    };

DOIT();

$elements = {
        'butterscotch' => {
               'a' => '1',
               'b' => '2',
           },
        'content' => "Look at me Maa, I'm eating buttterscotch",
    };

DOIT();

sub DOIT {
    my $xs = new XML::Simple();
    my $xml = $xs->XMLout(
        $elements,
        rootname => 'source'
        );

        print Dumper $elements;
        print $xml;
        print '='x60,"\n";
}

__END__

$VAR1 = {
          'a' => '1',
          'b' => '2',
          'source' => '3'
        };
<source></source>
============================================================
$VAR1 = {
          'source' => {
                        'a' => '1',
                        'b' => '2'
                      }
        };
<source>
  <source a="1" b="2" />
</source>
============================================================
$VAR1 = {
          'butterscotch' => {
                              'a' => '1',
                              'b' => '2'
                            },
          'content' => 'Look at me Maa, I\'m eating buttterscotch'
        };
<source>Look at me Maa, I'm eating buttterscotch<butterscotch a="1" b=
+"2" />
</source>
============================================================
[download]

Your best bet is to invoke XMLout like

    my $xml = $xs->XMLout(
        { content => 'I am content',
          thecgi => $elements,
          PARAM => [ $cgi->param('PARAM') ],
        },
          rootname => 'source',
        );
[download]

my %elements = $cgi->Vars();
[download]

____________________________________________________
** The Third rule of perl club is a statement of fact: pod is sexy.