The catch is that what you're asking to do involves changing the logical structure of the XML document by adding significant spaces, and XML::LibXML sees toString as a serialization function.

and it did not make a difference

I just tried it. It makes a huge difference. Not for the good, though. While it pretties up the part that isn't prettied up, it pretties up the part that's already been prettied up too.

use strict;
use warnings;
use XML::LibXML;
print XML::LibXML->new->parse_fh(*DATA)->toString(2);

__DATA__
<?xml version="1.0" encoding="UTF-8"?>
<config>
  <sites>
    <site>
      <sitename><![CDATA[www.example.com]]></sitename>
      <active><![CDATA[1]]></active>
      <rooturl><![CDATA[http://www.example.com.com/]]></rooturl>
      <name><![CDATA[Example]]></name>
    </site>
  <site><sitename>Test entry</sitename><name></name><rooturl><![CDATA[
+http://www.test.com.com/]]></rooturl><reportname><![CDATA[test report
+ name]]></reportname></site></sites>
</config>
[download]

?xml version="1.0" encoding="UTF-8"?>
<config>


  <sites>


    <site>


      <sitename>
<![CDATA[www.example.com]]>
      </sitename>


      <active>
<![CDATA[1]]>
      </active>


      <rooturl>
<![CDATA[http://www.example.com.com/]]>
      </rooturl>


      <name>
<![CDATA[Example]]>
      </name>


    </site>


    <site>
      <sitename>
Test entry
      </sitename>
      <name/>
      <rooturl>
<![CDATA[http://www.test.com.com/]]>
      </rooturl>
      <reportname>
<![CDATA[test report name]]>
      </reportname>
    </site>
  </sites>


</config>
[download]

Yes it is a little odd, I am using the 1 option as opposed to the 2 option as I don't like all the carriage returns :-) I've toyed and toyed with this for a whole day last week and it's just odd, that the document I created in the first place was with the same exact methods, steps etc as the 'revised' document. All this effort so I can make a new entry in this xml file and the lead on the project likes it a certain way.

I do thank you all for your input, even if I can't solve this the way I want, I have learned new things!

xmllint is a tool that uses libxml and comes with it. It's --format option does what you want. All the work appears to be done by a library function htmlSaveFileFormat. You could patch XML::LibXML to expose that function. You're not the first whose wanted a pretty print function from XML::LibXML.

Update: The simplest solution would be to add an optional format argument to $doc->toStringHTML and swap in htmlDocDumpMemoryFormat for htmlDocDumpMemory in that function.

Update: Never mind, htmlDocDumpMemory simply calls htmlDocDumpMemoryFormat with the format option set, and it doesn't help.