The institution informed the funding recipient that a financial correction had been imposed. This means that, after approving the payment application, it identified an irregularity concerning expenditure included in that application and determined the amount of the financial correction. The Act links the method of addressing an irregularity to the point at which it is identified. Before a payment application is approved, the institution reduces the amount of eligible expenditure; after approval, it imposes a financial correction.
At this stage, it is crucial to establish what exactly the institution regarded as an irregularity, which obligation it considers to have been breached, and how it determined the amount of the correction.
What is a financial correction?
A financial correction means that all or part of the funding attributable to particular expenditure is excluded from financing because an irregularity has been identified.
At EU level, this mechanism is based on Article 103 of Regulation (EU) 2021/1060 (the Common Provisions Regulation). It requires Member States to protect the Union budget by applying financial corrections consisting in the cancellation of all or part of the support where expenditure declared to the Commission is affected by an irregularity.
In the Polish system, the procedure to be followed after an irregularity has been identified is laid down in Article 26 of the Act on the rules for implementing tasks financed from European funds under the 2021–2027 financial perspective (the Implementation Act).
From the funding recipient’s perspective, a financial correction therefore means that the institution has identified an irregularity concerning expenditure included in an approved payment application and determined its impact on the financing of the project. A further issue is how the funds affected by the correction are to be settled, particularly where they have already been paid to the funding recipient.
When can a financial correction be imposed?
In practice, the significance of a financial correction is easiest to understand by looking at how most EU-funded projects are financed. In many programmes, funding is provided on a reimbursement basis. This means that the funding recipient first incurs expenditure from its own resources and then submits a payment application seeking reimbursement.
When verifying a payment application, the institution assesses whether the reported expenditure was incurred in accordance with applicable law, the call documentation, relevant guidelines, and the funding agreement together with its annexes. If it identifies an irregularity affecting part of the costs, it may conclude that the expenditure concerned – in whole or in the relevant part – is not eligible for financing from public funds.
The procedure following the identification of an irregularity depends on when it is detected. In this respect, the Implementation Act distinguishes between situations where the irregularity is identified before a payment application is approved and those where it is identified after approval:
- If an irregularity is identified before the payment application is approved, the institution reduces the amount of eligible expenditure included in the application by the amount of expenditure incurred irregularly.
- If, however, the irregularity is identified after the payment application has been approved, the institution imposes a financial correction.
For example, if a company incurred expenditure of PLN 1,000,000 and the institution applies a financial correction of 25%, the amount of funding will be reduced by PLN 250,000. In other words, that portion of the cost will not be financed from the project budget and will ultimately have to be borne by the funding recipient itself.
Financial correction and repayment of funds
In practice, the terms “financial correction” and “repayment of funds” are often used interchangeably. They refer, however, to two different elements of the settlement of an identified irregularity. The imposition of a financial correction and the recovery of funds from the funding recipient are related, but they concern different stages in the settlement of an irregularity.
A financial correction determines the effect of an irregularity on EU financing of the project. If, however, the funds affected by the irregularity have already been paid to the funding recipient and the conditions set out in Article 207 of the Public Finance Act are met, a separate issue arises as to their recovery. Article 207 governs the repayment of funds used contrary to their intended purpose, used in breach of applicable procedures, or received unduly or in excessive amounts.
This distinction also has a procedural dimension. If the institution concludes that the funds are subject to repayment, it calls on the funding recipient to repay them or to consent to a reduction of subsequent payments. Only if the time limit specified in Article 207(8) of the Public Finance Act expires without effect does the institution issue a decision determining the amount to be repaid.
This distinction is confirmed by the case law of the Supreme Administrative Court, which indicates that a financial correction and repayment of funds are two separate stages in the settlement of an irregularity: the first concerns determining the amount of ineligible expenditure, while the second concerns the actual recovery of that amount from the funding recipient.
From a company’s perspective, this distinction is therefore important. A financial correction answers the question of how much the funding will be reduced at the stage of verifying a payment application. Recovery of funds, in turn, determines how and when the funding recipient will bear the financial consequences of the identified irregularity.
Is a financial correction an administrative decision?
This is one of the questions that most frequently arises after receipt of a letter informing the funding recipient that a financial correction has been imposed. A financial correction is not an administrative decision. It is a determination made by the funding institution after identifying an irregularity in the project. At this stage, the institution states that, in its view, an irregularity has occurred and determines the amount by which the funding awarded to the funding recipient should be reduced.
The Supreme Administrative Court has expressly emphasised that a financial correction, as an action taken by an administrative authority, does not take the form of an administrative decision. It is a preliminary determination based on specific factual circumstances and may form the basis for further action aimed at recovering the funds.
In practice, this means that the institution does not issue an administrative decision at this stage, but sends the funding recipient a letter informing it that an irregularity has been identified and specifying the amount of the financial correction. Such a letter expresses the institution’s position as to what part of the funding should no longer be financed from public funds. It is not, however, an administrative act issued under the Code of Administrative Procedure.
Is a financial correction final?
Receiving a letter informing the funding recipient that a financial correction has been imposed does not mean that the matter has been finally determined.
This is most often the beginning of a dispute between the funding recipient and the funding institution. A letter containing information about a financial correction reflects the institution’s position, but does not automatically mean that the assessment is correct. The funding recipient is entitled to present its own explanations and arguments showing that the institution’s position is unfounded or that the amount of the correction has been determined incorrectly.
In practice, the dispute may concern both whether an irregularity occurred at all and the financial consequences attributed to it.
The funding recipient may argue, in particular, that there was no breach of the applicable rules or funding conditions, that the identified deficiency was purely formal in nature and could not have affected the European Union budget, or that the institution calculated the amount of the correction incorrectly. It is also common for the institution to fail to take account of all the circumstances of the case or to overlook documents and explanations submitted by the funding recipient.
Experience shows that a properly prepared position may have a material impact on the outcome of the case. Depending on the circumstances, it may lead to a change in the legal assessment, a reduction in the amount of the correction or, in some cases, the correction being withdrawn altogether.
What should you do after receiving a letter concerning a financial correction?
The first step should be to identify the irregularity that the institution attributes to the funding recipient. A general statement that the rules governing project implementation were breached is not sufficient for a proper assessment of the case. It is important to determine which specific obligation is said to have been breached, which document that obligation arises from, and what facts — in the institution’s view — support that conclusion.
If the institution has challenged expenditure, imposed a financial correction or the matter may lead to a demand for repayment of funds, see how the Law Firm supports funding recipients in matters concerning financial corrections and repayment of funding.
The next step is to compare the institution’s position with the project documentation. Relevant sources may include the applicable legislation, the grant agreement and its annexes, the project selection rules, guidelines, call documentation, payment applications and correspondence exchanged with the institution during project implementation. Only on that basis is it possible to assess whether the institution correctly classified the conduct in question as an irregularity and whether it correctly determined its financial consequences.
The applicable provisions do not provide for a uniform time limit for responding to a notice informing the funding recipient of a financial correction. In practice, institutions often set a specific deadline for the funding recipient to provide explanations or additional documents. If such a deadline has been specified, the response should be submitted within that period. The response should be factual, supported by documentation, and explain why no irregularity occurred in the particular case or why the financial consequences determined by the institution are excessive.
Summary
A financial correction is a consequence of identifying an irregularity relating to expenditure included in an approved payment application. Upon receiving such a notice, the first step is to determine which obligation is alleged to have been breached, what circumstances the institution relied on in reaching that conclusion, and how it calculated the amount of the correction.
The stage of the proceedings is also important. The imposition of a financial correction, a request for repayment of funds, and a decision determining the amount to be repaid are successive steps with different legal implications. The appropriate response by the funding recipient therefore depends on the type of document received and the procedure under which it was issued.
Experience shows that failure to respond to correspondence from the institution or failure to meet the specified deadline may make it significantly more difficult to defend the funding recipient’s position at a later stage. A carefully prepared response may lead to a change in the institution’s assessment or a reduction in the amount of the correction.
More information on legal support for funding recipients in matters concerning project controls, financial corrections and repayment of funding is available under: Project modifications, Project indicators and Grant settlement.
