I am posting this for anyone else who needs help, maybe I was being dumb before figuring this out but this is the method I got it to work correctly:
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Flash the .img.xz to a USB via Balena
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Create a Debian/GNU VM and don’t select a source.
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Before starting configure your preferred VM config, and go to Hardware > Boot Order
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Check External Device, and select your USB from the drop down
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Then choose Advanced, and select EFI 64-bit. It is important that you do this before completing the setup new VM Wizard, as this option seems to vanish afterwards, which was the main cause of my trouble.
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Boot it and proceed with normal steps to complete install.
I hope this helps others!