XML parsers generally want to see the raw bytes - the parser libraries know how to determine the encoding and convert the bytes from the file into characters in Perl's internal encoding.

In your example code, you're opening the file with an IO layer that will convert the bytes to characters so by the time the data gets to the XML parser the bytes have already been converted to characters. The parser library doesn't know that though so it will try to convert them as if they were bytes and that will fail.

The short answer is that you're doing too much. Just give XML::Simple the file name:

#!/usr/bin/perl

use strict;
use XML::Simple qw(XMLin);
use Data::Dumper;

my $xm = XMLin("xml/breadtitle.xml");

print Dumper($xm);
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But, having said that, you should never call XMLin without specifying any options. See this article for guidance.