Internal or outsourced accountancy?
Which accountancy is better – internal or external (outsourced)?
Without going into the question about the role of accountancy in sustainable activity of every business organisation – which is fundamental but maybe I get back to it in another post – let’s try to compare the both solutions, i.e. internal and outsourced accountancy, in close relationship with the business reality in Poland.
The standard answer to this question I could hear many times during my meetings with entrepreneurs is “As long as my business doesn’t grow up to the level I could afford my own accountant I HAVE TO have the outsourced accountancy and cooperate with an accounting firm.” So, is this really a matter of having enough financial means?
Well, it’s hard to deny that a good internal accountancy requires some expenses. A salary of a good accountant, even if this profession generally doesn’t belong to the top earners, will take several thousands PLN monthly (remember the social security that must be paid additionally by the employer). Apart of that, the internal accountancy needs an adequate office space, IT hardware and special accounting/payroll software. Don’t forget that the accounting department is the place where the most sensitive data and documents are collected and proceeded, so it is indispensable to ensure that all security and confidentiality issues are covered. Furthermore, the accountant needs a continuous training, so there are adequate costs for external courses, books, accounting internet portals etc. to be planed. Then, you have to answer also the questions like: What happens when the accountant takes holidays or a long-term sick off? What if the hardware doesn’t work or the software/network gets corrupt (backups!)? And if the accountant quits without a notice period – what then? But even having covered all these issues you are still not ready for answering the main question from the title. So, what do we miss in our calculation?
I call it with one word: liability.
Let’s say there is a tax audit in your company. A smart guy comes from the tax office, shows you his identity card and authorization to start the tax audit. After a few days (or weeks) of checking the documents, spreadsheets, tax returns etc. he comes to your office with one of your sale invoices, 100.000 EUR, issued two years ago, in the hand and asks why the company did not pay the usual VAT rate on it. An instant investigation shows immediately that it is an invoice for a delivery of goods that were ordered by your customer in Germany. That is why the accountancy issued an invoice with 0% VAT. But the goods were delivered not to Germany but to the Polish branch of the German company so in fact the goods never left the territory of Poland and thereby – alas, alas! – the only possible VAT rate to be applied was the one for domestic transactions, i.e. 23%.
The problem is serious since the loss of the revenues for the State exceeds clearly the amount of 8.750 PLN which is the threshold for treating the case as a criminal offence. Not only the company has to pay back the 23.000 EUR (with interests for 2 years) and pay a fiscal fine for documentation non-compliance. The tax officer may also bring charges against you as the manager of the company for attempted tax fraud which may end up in a high fiscal fine for you or even – let’s talk also about the worst scenario – in a ban on engaging in commercial activities and/or imprisonment (rarely but possible).
Naturally, there are some defence strategies and legal measures that could be taken in order to minimize the consequences and I’m sure that they will be explained in detail by the lawyer you may want to engage then.But you are still in troubles, even if you see the invoice the first time in your life.
Exactly! It was not you who issued the invoice, it was not you who put the wrong VAT rate on it and it was not you who did the accountancy in the company… So maybe this could be the most efficient line of defence?
In the case of internal accountancy the answer is “No”.
The tax law in Poland is clear in this regard: it is the entrepreneur that is responsible for calculation and payment of all taxes and social contributions. Therefore, if a tax audit discovers any non-compliance it is the company itself, thus the management of the company, that is liable for that abuse. And there is hardly any possibility to transfer the personal liability on his own employee (accountant) as – according to the Labour Code – the employer is obliged to exercise direct supervision of his employees. The financial consequences are also mostly uncovered since – here again the Labour Code is to be applied – after having proved his full personal responsibility for the error an employee can be punished up to his three monthly salaries. A financial punishment that exceeds this amount is possible only if the losses arise from deliberate actions, which is in such cases hardly (or never) possible to be proved.
The situation looks much better if you have outsourced your accountancy. First of all, you can use this as your line of defence against possible charges for a tax fraud. The court may accept the explanation that the manager didn’t have the required knowledge and experience in accounting and that is why the outsourced accountancy was engaged. There were already cases that the judge interpreted this clearly to the advantage of the manager and acquitted him from charges.
Secondly, after you have paid the penalties imposed by the tax administration you have a recourse to the accounting firm and so it is quite possible you will receive the whole amount back. Each provider of accounting services in Poland, no matter if it is one-person business or a big accounting company, must have a professional liability insurance that may be used in such a case. However, the compulsory insurance covers the losses only up to 10.000 EUR (for each case), so if you expect high value transactions in your business ask your outsourced accountancy for their insurance. They should have an additional policy for an amount that covers all the tax risks you may face in your business activity. And if they are not ready to do it maybe you should start looking for another accountant. With a good (and insured) accountancy the life is much easier.