Windows XP - Upgrading in Parallels?

I wonder if anyone can help a novice with VM's and Parallels.

Recently transferred my window XP environment without issues, but now I'm stuck on the windows XP licensing issue that many others on the forum have. According to Microsoft I need to purchase XP rather than transfer the OEM software from the PC. Can I;

--- Upgrade in the VM rather than starting from scratch on my PC. If so, how do I go about it?

--- If I buy a new OEM or upgrade license, will this work?

--- Or do I have to buy a full license which of course is a huge cost and frankly not worth my while.

Any help or suggestions greatly appreciated.

Thanks

Gary P