I agree with Ronnie in the fact that App-V is not a compatibility tool as the sequencing process checks the registry keys, directories and user profile for information used by the application. However the Application Compatibility Toolkit (ACT) might have what you need as you will most likely need to provide shims (compatibility fixes) to make a Windows XP application compatible with the Standard User Security Architecture or SUA introduced with the Vista OS.
Now I do understand that you need to run this app on Windows 8.1 but the User Account Control has for the most part been the same, and when the Windows XP app is expecting to have access to privileged locations that are not allowed in Windows 8.1 the app most likely will fail.
App-V will make sure that the application runs in it's own isolated environment BUT the underlying architecture (Windows XP) will still need to be present when the app runs. So I would try and using the ACT to make the application compatible with Windows 8.1 first and then determine why you need to virtualize it.
I hope this helps point you in the right direction and please keep us informed as we are more than willing (if we can....lol) help you with this.