As a taxpayer, a business remains liable for tax obligations even when it hires an external professional service company to maintain its accounting books.
During the economic crisis, many businesses are looking for ways to cut costs. One approach is outsourcing, in which specific functions are carved out of the organisational structure of the business and contracted out to external specialists. The business process outsourcing market is growing rapidly, offering expanding services in this area. Outsourcing may cover functions that are directly tied to the client’s business or to its internal organisation.
Outsourcing of accounting services may include:
- Maintaining accounting and tax records
- Payroll calculations
- Administrative accounting
- Accounting advice, e.g. concerning the rules for financing of business operations, capital structure and financial liquidity
- Tax planning
- Preparation of required documentation, reports and declarations.
When deciding to outsource specific functions to external entities, the main goals include:
- Reducing the costs incurred by the particular department
- Making use of the specialised, professional knowhow and efficiency of the external entity
- Strengthening the company’s focus on its core business
- Limiting the risks associated with carrying out tasks requiring specialised knowledge.
Companies seeking to cut their operating costs more and more often decide to eliminate their in-house accounting departments, turning over these tasks to external accounting firms. This carries an additional benefit with respect to liability for potential irregularities in accounting or tax documentation. In Poland, the personal liability of staff employed in an in-house accounting department is limited by the Labour Code, but the liability of an external accounting firm is typically determined by the contract with the client or by general rules of civil liability.
While contracting out specific business functions to an external supplier may generate the benefits mentioned above, the associated risks must not be overlooked.
Typical downsides of outsourcing may include:
- Access by an external entity to confidential information of the business
- Loss of the ability to exercise direct, ongoing control over the matters handled by the outside firm
- Restriction of direct access to data concerning the client’s business operations (apart from online access)
- In certain situations, the client’s responsibility for the results of the services provided by the external entity.
A decision to outsource specific functions will thus always be the outcome of a certain cost/benefit analysis.
Check their qualifications
Before a business enters into an agreement to outsource accounting services, it should pay particular attention to the required qualifications of the service provider and its scope of liability.
Under the Accounting Act, services involving maintenance of accounting and tax records and preparation of tax filings may be performed only by qualified persons, i.e. certified accountants, auditors, or tax advisers. Qualified persons may perform these services with the assistance of non-qualified persons, but if so they must provide direct, ongoing supervision over the performance of such tasks.
Note! It is equally important to use a properly worded outsourcing agreement, which may significantly reduce risks and negative consequences for the client.
Scope of contractual duties
The scope of the accounting services should be established in the outsourcing agreement between the client and the accounting firm. Under Polish civil law, such agreements generally fall within the group of unclassified agreements, although they may also contain elements typical for a contract of mandate or a service agreement.
A contract for outsourcing of accounting should specify:
- The procedure for providing accounting services
- Rules for communication
- Rules for circulation of documents
- Rules for preparation of the required documentation
- Rules for providing access to information
- Deadlines for performance of the contractor’s duties.
The rules for determining the contractor’s fees should also be clearly stated. There may be a fixed fee, or a fee based on the amount of work required, or a combination of the two.
An outside firm agreeing to provide accounting services should hold an up-to-date insurance policy for civil liability for losses arising out performance of the services. The client should also assure that the amount of the coverage is adequate in light of the scale and complexity of its business.
It should be stressed that notwithstanding entrusting the maintenance of accounting books to an external professional service provider, the client, as a taxpayer, is still fully liable for its own tax obligations, pursuant to Art. 26 of the Tax Ordinance. Similarly, under Art. 52(1) of the Accounting Act, the director of the unit (such as the management board of a company) must assure that the annual financial report is prepared no later than three months after the balance sheet date and submitted to the competent authorities under the laws applicable to the unit and the company’s articles of association.
In other words, the business continues to be responsible for accounting reports and tax obligations even if it outsources the maintenance of the accounting records.
Right to damages
However, if a business that outsources accounting services suffers a loss, or criminal or administrative sanctions e.g. for tax arrears, due to the fault of the service provider, the client will be entitled to pursue a civil claim against the service provider for contractual damages under general rules. To make it easier to enforce claims for breach of contract in provision of accounting services, the parties may provide for a contractual penalty, making it unnecessary for the client to prove the specific amount of the loss. However, the client should also include a right to pursue additional damages if the amount of the loss exceeds the amount of the contractual penalty.
The outsourcing agreement should impose a confidentiality requirement on the provider of accounting services (possibly with a contractual penalty if it is violated).
After conclusion of an outsourcing agreement for accounting services, it is also important to remember the duties arising under the Accounting Act.
Duties of the accounting firm
If the accounting books are maintained elsewhere than the location of the registered office or management of the unit, the director of the unit is required under Art. 11a of the Accounting Act to:
- Notify the relevant tax office of the location where the accounting books are maintained, within 15 days after they are delivered there
- Assure that the accounting books and supporting records are accessible to the competent external audit and supervision authorities at the location of the registered office or management of the unit, or other location at the consent of the relevant authority.
It is also important to note the possibility of a business from Poland appointing a qualified service provider from another member state of the European Union or the European Free Trade Agreement to maintain its accounting books. This may be particularly relevant for businesses registered in Poland but part of a larger capital group in which the entity responsible for handling the accounting of all group companies is registered outside Poland. Although this approach is legally permissible, it is subject to certain conditions set forth in the Accounting Act which should be considered when taking such a decision.
Outsourcing of accounting services may generate financial and organisational benefits for the client while assuring it high-quality services from a specialised outside entity. Outsourcing can enable the client to streamline its operations and increase its effectiveness by focussing on its core business.
But it is important for the outsourcing agreement to define clearly the scope of the service provider’s duties, the rules for calculation of fees, and the principles of liability for performance of the outsourced tasks.
Kinga Ziemnicka and Łukasz Śliwiński, Corporate Law, Restructuring and Business-to-Business Contracts practices, Wardyński & Partners
The Polish version of this article was published in the “Expert” supplement to Rzeczpospolita daily on 6 May 2013.