Audit expenses - are they tax costs?
Some entrepreneurs, in order to avoid any unpleasant surprises during the tax inspection, outsource accounting and bookkeeping audits to confirm the correctness of the applied settlements. Audits are mandatory in some cases.The amounts spent on them are significant, so the question arises whether the audit expenditure may be a cost?
An entrepreneur's annual financial statements are subject to mandatory audit by a statutory auditor if the company, in the previous financial year for which the financial statements were prepared, has met at least two of the following conditions:
average annual employment converted into full-time jobs amounted to at least 50 people,
the total assets of the balance sheet at the end of the financial year were the Polish currency equivalent of at least EUR 2,500,000,
net revenues from the sale of goods and products as well as financial operations for the financial year were the Polish currency equivalent of at least EUR 5,000,000.
The amounts expressed in euro are converted into the Polish currency at the average exchange rate set by the National Bank of Poland on the balance sheet date, assuming 31 December as the balance sheet date.
On the other hand, tax deductible costs are costs that are related to the achievement of income or the protection of sources of income, except for the costs listed in the catalog of expenses not recognized as costs.
Therefore, these are costs directly and indirectly related to the obtained income and costs related to the overall activity of the taxpayer, i.e. related to the functioning of the company.
Audit expenses are indirect costs, they are related to the functioning and running of the enterprise as a whole. The tax authorities also confirm that indirect costs constitute costs, for example, a letter of the Director of the Tax Chamber in Bydgoszcz, which in the individual interpretation of November 30, 2011, ref. No. ITPB3 / 423-466c / 09 / MK stated that:
(...) these expenses are incurred in connection with the proper functioning and running of a business entity - they relate to the overall activity of the taxpayer, these expenses result from the need to make certain economic decisions by the entity conducting, for example, developer activities.
For these reasons, the expenses on this account may be classified as tax deductible costs - they constitute indirect costs of the business (...).
Moreover, Art. 23 sec. 1 of the PIT Act does not mention the costs related to the purchase of an accounting and bookkeeping audit, and the regulations do not provide for any limit for this type of expenditure.
Therefore, it should be considered that both compulsory and voluntary audit is a cost. This position was confirmed by the Minister of Finance in a letter of April 26, 2002, no. PB3-8214-99 / WK / 02:
(...) Expenses incurred for the audit of the financial statements, both obligatory and based on the decision of the governing bodies of an entity that has no statutory obligation to audit its annual financial statements - pursuant to (...) Art. 15 sec. 1 (the PDOP Act - editorial note) are classified as tax deductible costs at the time they are actually incurred. The above applies to an audit that is related to the normal course of business of an entity, and not, for example, to sell an enterprise. (...)
As we know, audits usually last several days, which is often associated with the costs of accommodation and food of the people carrying out it. The obligation to provide them often rests with the service buyer. As indicated by the tax authorities, there are no obstacles to include such expenses as costs. As indicated by the Head of the Tax Office in Krosno in the individual ruling of May 12, 2005, no. PDP 4211 / IN / CIT / 3/2005:
(…) Expenditure on accommodation, meals and transport of the auditors who check the compliance of the certificate and the quality system of welding works as part of the external audit do not meet the criteria of representation or advertising. In the assessment of the presented facts, the above-mentioned expenses meet the criterion of Art. 15 sec. 1 of the CIT Act, as they are related to the conducted business activity, they contribute to maintaining contacts with contractors and attracting new clients (...).
Audit expenses and VAT deduction
Joke. 86 sec. 1 of the VAT Act shows that the taxpayer has the right to reduce the amount of tax due by the amount of input tax to the extent that goods or services are used to perform taxable activities. Can audit expenses therefore constitute a deductible cost?
Regardless of whether it was obligatory or optional, audit services are entitled to a deduction of VAT. Such a position was confirmed by the Director of the Tax Chamber in Warsaw in an individual ruling of 30 December 2013, ref. No. IPPP1 / 443-1138 / 13-2 / ISZ, in which we read:
(…) based on Article. 86 sec. 1 of the Act, the Company has the right to deduct input tax related to the expenses incurred, i.e. for the purchase of shares / stocks (by contributing cash capital to new enterprises), accounting services, advisory and expert services, financial audit, remuneration with surcharges of employees directly involved in implementation of the Project and project managers, business trips of employees directly involved in the implementation of the Project and Project managers, purchase of transport, telecommunications, postal and municipal services, rental and use of premises, renovation, repair or adaptation of premises, purchase of office and consumables, translation and printing of materials and publications, promotional and information activities (...).
Time of deduction of VAT
According to the general rule, the right to reduce the amount of tax due by the amount of input tax arises in the settlement for the period in which the tax obligation arose in relation to the services purchased by the taxpayer of goods and services. However, in order for the VAT deduction to be realized, it is necessary to receive an invoice. It is also important that the legislator stipulated that the deduction may not be made earlier than in the declaration for the accounting period (month / quarter) in which the taxpayer received the invoice.
In the case of audit services, the tax obligation arises on the general principles set out in Art. 19a paragraph. 1 of the VAT Act. According to it, the tax obligation arises when the goods are delivered or the service is performed.
If, prior to the performance of the service / delivery of the goods, all or part of the payment has been received, in particular prepayment, advance payment, down payment or installment, the tax obligation arises upon its receipt, in relation to the amount received.