Breaches of budgetary discipline: how to calculate the levy and penalty and when to apply for a waiver

The article clearly explains what exactly the law considers to be a violation, how the amount of the levy and penalty is determined, who decides (and under which procedural rules), and when and where you can apply for a waiver of the levy and penalty.

What constitutes an infringement of budgetary discipline under the Financial Regulation

There are two legal regulations: the Act on Budgetary Rules (for the state budget and state funds) and the Act on Budgetary Rules for Territorial Budgets (for municipalities, regions, unions of municipalities, municipal districts). Both regulations state that a breach of budgetary discipline constitutes an unauthorised use or withholding of public funds.

Unauthorised use

An irregular use is any use contrary to the law or the terms of the grant (including directly applicable EU rules). It may be, for example, the payment of a cost not allowed by the grant, failure to fulfil the purpose of the grant, breach of obligations laid down in the decision/contract or a specific regulation (typically public procurement rules), or a situation where the beneficiary fails to prove how it has used the funds.

The date of the infringement is the date of the unauthorised use (for retrospective grants, the date of crediting). In the event of a breach, the beneficiary of the grant must make a payment to the budget from which the money was granted.

Withholding of funds

A hold is a failure to return funds by the due date. The day of the breach is the day after the deadline for repayment has passed. In the event of a breach, the beneficiary of the grant must make a payment to the budget from which the money was granted.

Who decides and according to what process

For state subsidies, the tax authorities administer the levies and penalties under the Tax Code. The recipient has the status of a tax entity and applies the usual procedural institutes (appeals, time limits, due dates).

In the case of territorial subsidies, it is typically the municipal or regional authority (or the authority of a union of municipalities) that decides, and here too the law refers to the Tax Code for the administration of levies and penalties. There is a difference in the waiver procedure: for state subsidies, the General Financial Directorate (GFD) decides, while for territorial subsidies, the decision is taken by the subsidy provider (by the procedure by which it granted the subsidy).

Levy for breach of budgetary discipline: basic rules, limit and principle of proportionality

The basic logic of the levy is restitutive: what has not fulfilled its purpose or has been used contrary to its conditions is recovered. For state subsidies, the law distinguishes several situations. If the provider has fixed in advance a lower levy for less serious breaches (fixed amount, fixed percentage, range), the tax authority must follow this and assess the seriousness of the breach and its impact on compliance with the purpose when collecting the amount from the range.

The levy may not exceed the total amount of the grant paid (with exceptions provided for by law). Similarly, for territorial subsidies, a lower levy is used for less serious obligations and the law explicitly states that the reasonableness and impact on the purpose of the subsidy is taken into account when determining the amount of the levy. In both regimes there is a trivial threshold: if the aggregate of the levies for one subsidy does not exceed CZK 1 000, no levy is imposed.

Lower levy in practice

In order to make the lower levy work fairly, the Ministry of Finance has issued a methodology for defining in advance in the conditions of the subsidy the obligations whose breach will lead to a lower levy (fixed amount / percentage / range). This makes a predictable distinction between serious and less serious misconduct. Grant providers should take this methodology into account so that beneficiaries know in advance what is “worth how much”.

The administrative courts have confirmed that the amount of the levy should correspond to the gravity and real impact of the infringement. For example, the Supreme Administrative Court accepted a calculation based on the ratio of area to days when part of the project did not meet its purpose – thus the levy targeted precisely the non-purpose part of the subsidy. In other words, when only part of a project fails for a limited period of time, the levy should not automatically shoot down all of it.

Penalties: rate, calculation and maximum amount

A penalty payment is a statutory payment for late payment of the levy. From 1 January 2022, the rate is 0.4 per cent of the levy amount for each day of delay, up to a maximum of the levy itself (previously it was 1 per cent per day).

The penalty is calculated from the day after the day on which the breach occurred until the day on which the funds were paid. The same applies to territorial grants, and if the provider has fixed a lower levy in advance, the penalty is calculated on this mandatory amount. Penalties of up to CZK 500 ( State) or CZK 1 000 (territorial budgets) are not imposed.

A limitation period of 10 years applies in both regimes: the levy and the penalty may be imposed up to 10 years from 1 January of the year following the year in which the infringement occurred. This is a time limit after which the State or local authority will not impose the levy or penalty.

Remission of levies and penalties: when, where and how

Remission of levies and penalties is not an automatic right, but an exceptional possibility “for reasons of special consideration”. In the case of state subsidies, the GFD decides on the waiver (on application via the tax office) within 1 year of the legal force of the payment assessment. In the case of territorial subsidies, the waiver is decided by the subsidy provider in the same way as the subsidy was granted; the one-year time limit applies here as well.

The levy and the penalty are not a fine

The levy for breach of budgetary discipline is not a criminal sanction for an administrative offence. Its purpose is to return public money that has not served its purpose back to the budget. The way the courts assess the reasonableness and calculate the amount is consistent with this. This distinction is practically important – for example, it is not the principles and limits of administrative punishment that apply, but the rules of tax administration and case law on the tax code.

How to proceed when there is a threat of a breach

From a practical point of view, we recommend several principles. First, the violation counter runs from the date of the unauthorized use (or from the day after the late return date), and thus the penalty starts to run. So it pays to act quickly – request an internal audit of the project, determine the extent of the problem and contact the funder.

For territorial grants, a call for corrective action or repayment of part of the funds is an option; what you return voluntarily is not considered a breach to the extent of the repayment. For government grants, look to see if the provider has identified lesser conditions and a lower levy in advance; be proportionate in your evidence – even case law accepts proportionate calculations if they accurately reflect the extent of the non-intended use.

Background tax rules: why they matter

Because the levy and penalty are administered under the tax code, tax procedural institutions apply – for example, appeals, the possibility of a stay or a time limit. Interest may accrue if the tax administrator acts unlawfully. In practice, this means that you should think as carefully in levy and penalty proceedings as you would in a regular tax dispute.

Model situation: ineligible item in the project budget

Imagine that in a project approved to upgrade a community centre, you use the grant to pay for an item that is not an eligible expenditure in the decision (e.g. luxury equipment that was not budgeted for). The audit finds a breach and the provider asks you to repay part of the grant. If you repay the funds, to the extent of the repayment, the matter is treated as if there was no breach – this will also eliminate the penalty.

If you don’t repay, there is likely to be a levy and a penalty will run. If the provider has defined in the terms and conditions that it is a lesser obligation with a lower levy, this will be reflected in the amount. In a disputed case, you can argue proportionality and reasonableness.

Where to find the rules and guidance

The basis is found directly in the laws – the Budget Rules Act (for the state budget) and the Act on Budget Rules for Local Budgets (for municipalities and regions). Practical interpretations and guidance are issued by the Ministry of Finance (e.g. methodological guidelines on lower levies) and the Tax Administration(Series D guidelines on waiving levies and penalties and other issues). For current case law, see the Supreme Administrative Court.

Check-list for grant recipients

As a grantee, be clear at the outset who the grantor is and what conditions it has identified as “minor”with a lower levy. Continually gather evidence of the use of the funds – for each expenditure, keep a record of why it is eligible and how it relates to the purpose.

Follow the procurement rules and document how you made your decisions. When an audit comes in and finds a discrepancy, communicate – for territorial grants, follow up with correction/recovery calls; for state grants, quantify the ratio of actual impact.

Practical glossary of basic terms

• Breach of budgetary discipline – unauthorised use or withholding of funds granted; the date of breach is the date of unauthorised use (or crediting in the case of retroactive grants) or the day after the deadline for repayment.
• Levy for a breach of budgetary discipline – the amount you have to pay to the budget; in principle corresponds to the extent of the breach, but may be lower for less serious conditions if the provider has specified this in advance.
• Penalty payment – a statutory payment for late payment, 0,4 ‰ per day up to the amount of the levy; minor penalties are not imposed.
• Subsidy provider – decides on conditions (including lower levies) and, for territorial subsidies, on waivers; for state subsidies, the GFD decides on waivers.
• Tax Code – procedural basis for the administration of levies and penalties.
• Remission of levies and penalties – exceptional measure for serious reasons. In the case of the State, the decision is made by the GFD; in the case of territorial providers (following the same procedure as the provider of the subsidy).

Summary

A breach of budgetary discipline is the unauthorised use or withholding of public funds – the date of the breach is the date of their unauthorised use (in the case of repayable subsidies, the date of crediting) or the day after the deadline for repayment. In the case of state subsidies, levies and penalties are administered by the financial authorities, in the case of territorial subsidies by the competent authorities of municipalities/regions. The law allows for a lower levy for less serious infringements, if the provider determines this in advance (fixed amount/percentage/range), assessing proportionality and real impact on the purpose; the courts also allow proportional calculations. Bagatelle levies of up to CZK 1 000 are not imposed.

The penalty is 0,4 ‰ of the levy for each day of delay, up to a maximum of the amount of the levy itself; it is calculated from the day following the infringement until the date of payment of the funds. No penalty is imposed up to CZK 500 (State) / CZK 1 000 (territorial budgets). Both the levy and the penalty can be imposed within 10 years (from 1 January of the year following the infringement). The remission is exceptional and limited in time: for state subsidies it is decided by the GFD within 1 year of the PM, for territorial subsidies by the subsidy provider. In practice: act quickly, map the scope, communicate with the provider, keep consistent records and, if necessary, invoke proportionality – the levy is not a fine, but the return of money used for no purpose.