If a supplier approaches you saying that the local authority has underpaid VAT to them, and you agree and want to fix it, here's an approach you can use to resolve the VAT underpayment to the supplier:
Create a dummy person If the shortfall is large and affects multiple people, if it's just an underpayment for one service user, use that person.
Create an adjustment provision element for the amount you need to reconcile and assign it to the dummy person to correct the supplier payment. You can label it 'VAT Correction Element' or use any wording you prefer, as long as it pays the supplier on a cycle without VAT.
Set the element as Outside of Scope or Exempt when configuring it.
Test this setup before implementing it live to ensure it works as expected.
Your site might already be familiar with using dummy persons, as they were used for block and overarching safeguarding before organizational workflow was implemented.