3612958 - Clarification on UK VAT Submission and MTD Compliance after manual adjustments

During the VAT return process, SAP provides an option to manually override values in the VAT boxes in UK VAT Submission in cases where certain document postings are not supported or when unavoidable circumstances arise.

If these figures are carefully reviewed to ensure accuracy and subsequently submitted to HMRC, would this approach still comply with Making Tax Digital (MTD) regulations or it violates MTD requirements?  

SAP S/4HANA Cloud Public Edition

With the concerns around the Digital Links requirement for the MTD solutions refer to  VAT Notice 700/22: Making Tax Digital for VAT - GOV.UK paragraph 3.4. 

"3.4 Adjustments

Where you’re allowed or required to adjust the input tax claimed or output tax you owe (according to the VAT rules), you must record this adjustment in 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.

If the adjustment requires a calculation, this calculation does not need to be made in functional compatible software. If the calculation is completed outside of functional compatible software, digital links are not required for any information used in the calculation. However, using software for all your calculations will reduce the risk of errors in your returns.

The following rule has the force of law:

Where the input tax claimed or output tax due on a supply has been changed as the result of an adjustment, you do not need to amend the digital record of the supply.

Example 1

A partly exempt business software allows it to record amounts of VAT relating to both exempt and taxable supplies. At the end of the period, they complete a partial exemption calculation and put the adjustment into their return. The calculation is not completed in the software. The business does not have to go back and change each line in the software to reflect the amount of recovery on each invoice.

Example 2

A business has a software package that requires a period to be closed before the return can be completed. After the period has been closed, the business calculates adjustments before submitting the return. Invoices are found that should be included on the return. The business can enter the figures as an adjustment to make sure the return is correct, but they must record the invoices in their functional compatible software to complete their digital records.

This only relaxes the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation."

The knub of the digital link requirement is from the financial transactions through to the submission of the final report to HMRC, and adjustments are expected to be the exception rather than the rule. 

The examples provided by HMRC in their documentation covers, for example, the adjustment that need to be recorded to complete the digital record (i.e. any adjustment journals require posting so they are recorded) but there is no need for there to be a digital link between the adjusted figures and the financial adjustment or calculations. 

In conclusion a digital link is not required for manual adjustments made to a VAT return prior to submission to HMRC.

A manual adjustment arises where there is some form of calculation (as indicated in published guidance) that cannot be realistically performed within functional compatible software.

Where a business makes manual adjustments there must be an audit trail between the adjustment and the supporting calculation. 

Although SAP provided the functionality to make manual adjustment it is the responsibility of the customer to ensure it is used within the guidelines and there is an audit trail for the adjustment.

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