Promotional material

VAT reporting – manual adjustments (part 8)

Updated 25 September 2024

Read purpose, scope and audience (part 1) and general approach to VAT compliance controls (part 2) of Help with VAT compliance controls — Guidelines for Compliance GfC8, if you have not already.

This stand-alone chapter expands on the section in VAT reporting that dealt with manual adjustments and includes control objectives for common types of adjustment.

Common types of manual adjustments

Manual adjustments to VAT reporting can occur for different reasons, for example:

• consolidation of totals from separate business functions or systems
• general ledger journals
• adjustments for errors and corrections
• totals for miscellaneous billing or purchases
• adjustments required by VAT regulations, for example for bad debts or partial exemption

The following sections deal with the more common types of adjustment but are not prescriptive or exhaustive.

Recording manual adjustments

The VAT account records must be kept, maintained and preserved digitally unless a customer has been given an exemption.

When tax adjustments are made, they must be recorded in the functional compatible software. Only the total for each type of adjustment will be required to be kept in functional compatible software, not details of the calculations underlying them. In this scenario calculations made outside of functional compatible software supporting VAT adjustments should still be kept separately for audit trail purposes.

Accrual adjustments

The term ‘input tax accrual’ in a VAT reporting context is the recognition of input tax on purchase invoices on hand at the end of a VAT Return period but not posted to the accounts.

Control points

1. A valid VAT invoice must be held to claim input tax.
2. Invoices must be recorded in functional compatible software.
3. The tax-point of VAT documents must not exceed the period end date.
4. Accruals should include valid supplier credit notes.
5. Reversal of a prior period’s accrual must be included on the current return.
6. Estimation of input tax can only be made with the agreement of HMRC.

VAT corrections

Error corrections should be made in line with applicable regulations. Corrections relating to a current period can be included on that return. Applicable smaller errors can also be included on the current return or else need to be notified to HMRC in an Error Correction Notice.

For more information, read how to correct VAT errors and make adjustments or claims (VAT Notice 700/45).

Control points

1. Include all corrections relating to the current period.
2. Document errors with an explanatory note, including the date, reason and amount.
3. Ensure corrections include reversals where new transactions have been raised.
4. Include all applicable VAT corrections from previous return periods in line with regulations.
5. Ensure VAT corrections do not duplicate previously submitted error correction notices.
6. Fixing the source of error to avoid re-occurrence, with appropriate regularity of review.

Employee related VAT adjustments

Employee expenses is an area where VAT adjustments, apportionments or blocking commonly occur. Adjusting for input tax on staff subsistence, entertaining or other expenses might be an automatic process following rules implemented in systems. Alternatively, manual adjustments might be required with separate reporting and oversight carried out by a central team.

Control points

1. A valid VAT invoice or VAT receipt must be held to claim input tax.
2. Input tax should be claimed in accordance with applicable staff subsistence rules.
3. Input tax should be claimed in accordance with the business entertainment rules.
4. Input tax should be claimed in accordance with applicable rules on staff mobile phone call charges.
5. Input tax should be claimed in accordance with the rules on motoring expenses.
6. Output tax may be payable on applicable rewards or gifts to staff.
7. Appropriate records must be kept to evidence input tax recovery on expenses, for example, mileage or gift logs.
8. Adjustments (such as input tax apportionments or blocking) made by special purpose VAT codes should be easily identifiable.

One-off or irregular supplies

Sometimes supplies for VAT purposes occur outside the normal run of business activities. There should be a process for reporting any irregular billing and and making sure it’s included in the VAT Return.

Control points

1. Disposal of assets should be reported and applicable output tax included in the VAT Return.
2. Assets or stock taken into private use should be reported and applicable output tax included in the VAT Return.
3. Services for temporary private use of business stock or assets should be accounted for and applicable output tax included in the VAT Return.
4. Manual sales or ad-hoc billing should be reported and included on the VAT Return.
5. Miscellaneous, minor retail or cash sales should be reported and included on the VAT Return.
6. Sample reviews and reconciliations of one-off or irregular supplies should take place due to the manual nature of the process.
7. Where possible, the VAT team should be included in the flagging and consideration of urgent, unusual or material transactions.
8. Specialist advice might be considered for larger unusual transactions as necessary.

Examples of miscellaneous sales could be:

• property transactions and rent
• irregular advertising revenue
• irregular commission receipts or intellectual property payments
• taxable compensation payments
• one-off consultancy fee
• old, de-commissioned stock or spares
• scrap

General ledger journals

Direct journal postings are those transactions that are created within the general ledger (so not sourced from sub-ledgers). They will typically be either directly input or uploaded from a pre-formatted spreadsheet. Some of these manual journals may have a VAT component and where not automatically included in VAT reports should be separately reported and included on the VAT Return. 

Control points

1. Direct journals should require authorisation, with appropriate segregation of duties.
2. Direct journals should be input by appropriate staff with restricted access control.
3. Use of master adjustment templates with pre-embedded formulae should be available for re-occurring adjustments and refreshed periodically to reduce the risk of manual error.
4. Direct journals should be accurately described.
5. VAT values are coded and calculated correctly.
6. VAT is posted to the correct VAT account (particularly if manually assigned).
7. VAT values are captured and included for VAT reporting.
8. The correct tax-point date is captured and used to report VAT.
9. Unposted journals with reject or hold status should be investigated promptly.

Partial exemption and Capital Goods Scheme (CGS)

A business is partly exempt if it makes, or intends to make, both taxable and exempt supplies and incurs input tax on costs which relate to both. A partly exempt business will need to use a partial exemption method to work out how much input tax they can recover. Calculations, typically on spreadsheets, can be outside of the functional compatible software.

The aim of the CGS is to recognise that business assets (capital items) can be used over a period of years and the extent to which they are used in making taxable supplies can vary. If, during the ‘adjustment period’ there is any change in the proportion of taxable use of a qualifying capital item, then an input tax adjustment must be made to take account for this. As with partial exemption, CGS calculations are typically carried out on spreadsheets and can be outside of the functional compatible software, however, businesses may choose to invest in software specifically designed for partial exemption calculations to reduce the risk of error.

For more information, read:

• Partial exemption (VAT Notice 706)
• Capital Goods Scheme (VAT Notice 706/2)

Control points

1. Where practical, automatic linking on spreadsheets is preferable to ‘cut and paste’.
2. Spreadsheets should be version controlled, to prevent outdated versions being used.
3. Access to spreadsheets or software tools should be restricted to authorised users.
4. Complex spreadsheets or software calculations should be documented to help establish an audit trail.
5. Use sense checks and comparisons to assure the recovery rate calculation.
6. Calculations must adhere to the applicable rounding rules.
7. Totals of VAT adjustments must be recorded in functional compatible software.
8. Retain evidence of calculations made, together with appropriate comments and audit trail.

We intend to provide further VAT compliance controls in relation to partial exemption in a future update to these guidelines.

Bad debt adjustments

Output tax already accounted for on supplies made but not paid for may be subject to bad debt relief, and an adjustment can be made to the VAT Return if the necessary conditions are met. Repayment of input tax claimed is also required where payment for the supply has not been made within the applicable time period.

For more information, read relief from VAT on bad debts (VAT Notice 700/18).

Control points

1. Systems must be in place to monitor aged debtors and creditors and identify potential bad debt adjustments.
2. Bad debt adjustments must be made within applicable time limits.
3. Bad debts on sales must have been written off in the VAT account and transferred to a separate bad debt account.
4. Output tax refunds are included in box 4 of the VAT Return.
5. If a part payment is made for the debt, only a refund on the VAT relating to the amount that is still unpaid can be claimed.
6. If a VAT refund has been claimed and a payment is later received for the supply, the VAT element of the payment must be included on the VAT Return.
7. Only input tax on the unpaid element of a supply is required to be repaid.
8. Subsequent payments relating to previously adjusted input tax allows the VAT element to be reclaimed.

Import VAT

Businesses can account for import VAT on overseas goods directly by using postponed VAT accounting (PVA). Accounting for imports in this way allows declaration of import VAT and reclaim as input tax (subject to the normal rules) on the same return. Alternatively, a business can choose to pay VAT on importation and reclaim input tax using the import VAT statement (C79) as evidence. Businesses can use any method to account for import VAT but using one method within the business could reduce the risk of error.

Control points

1. For PVA, import VAT must be included in the accounting period which covers the date the goods were imported.
2. Where possible tax codes or indicators are used to separately identify PVA transactions.
3. Monthly online PVA statements can be used to declare and reclaim import VAT and should be retained as evidence.
4. For PVA, the net value of imports should be included in box 7 of the VAT Return.
5. Where PVA is not used, an Import VAT Certificate (C79) is needed to show monthly VAT paid on imports and is the primary evidence for claiming the import VAT as input tax.