Business name or company
When you first start a company or a business name, you probably need to know the different tax implications of these two business models. A company is seen as a separate and distinct legal person from its founders and is issued with a separate PIN from its shareholders and directors. A company is required to file a separate tax return from its shareholders and directors.
However, a business name is seen as “the name by which an individual trades” and is therefore no different from the individual owner. An individual sole proprietor is supposed to file only one tax return for business income earned during a tax year.
There is only one mandatory tax registration for a Kenyan registered business – “Income Tax – Resident”. This refers to the income tax of 30% payable on any business income (either as corporate tax for a company or PAYE as an individual) earned in Kenya and from outside Kenya by a Kenyan tax resident company or individual.
For a company, all business income from business earned within Kenya and from outside Kenya is taxable in Kenya. For an individual, all worldwide business income, consultancy income and employment income is subject to tax in Kenya. Where a Kenyan citizen suffers tax in another country, they will enjoy a tax credit for that amount of tax suffered as long as they show proof of foreign tax paid and also that the foreign tax should not exceed 30%.
A new business (company or business name) should not register for VAT unless it expects to make KES 5m in annual taxable sales. Otherwise, having registered for VAT and failing to file a monthly VAT return attracts a punitive monthly penalty of KES 10,000, regardless if, for instance, the company is dormant.
A “PAYE – Employer” tax registration ought only to be registered for if the business has employees, with their being no requirement to register for Capital Gains Tax and Stamp Duty, as these are only initiated when buying and selling land, buildings and shares in a company not listed on the NSE.
Tax laws in Kenya require you to maintain all tax records for a period of 5 years, which corresponds to the “look back” period for the KRA when they would like to undertake an audit. A prudent business person would do one better and maintain scan copies of their records because of their ease of storage and retrieval.
The documents that are most important to maintain for a business are books of accounts (trial balance, profit and loss statement and balance sheet), signed and audited financial statements and all supporting documentation such as invoices, LPOs and agreements.
Tax liabilities of company directors and shareholders
There is a legal requirement under the Tax Procedures Act, 2015 for directors to ensure that the company is tax compliant. Directors should also take steps to ensure that company funds meant to pay tax are not diverted to other purposes, or company assets sold leading to the company not being in a position to default on its tax obligations, as and when they fall due.
If a director or shareholder fails in this duty, the KRA can come after their personal assets or any company assets in their possession or under their control in order to settle any tax arrears.
Tax provisions in business agreements
One needs to be careful when reviewing business agreements, to ensure that every party to the agreement bears their fair share of tax and fulfils their tax obligations as defined by applicable tax law.
For instance, whenever you are engaging a foreign consultant, e.g. from the US, Uganda, UK etc, it is important that you ensure that you are aware of a gross up provision in the agreement, that would obligate you to pay the consultant’s withholding tax in Kenya on their behalf. This would mean that the total cost would increase because you will have borne someone else’s tax.
It is also important to know whether withholding tax and VAT apply to the services / goods offered or delivered under the business contract, as well as understanding the other party’s tax registrations. This will allow you plan around your own tax obligations under the transaction.
Proactively manage your iTax profile
If you are a business owner and have engaged an expert to handle your bookkeeping and tax for you, make sure that you are aware of your tax obligations and when the relevant filing dates are. If you have employees, the filing date for your employer PAYE return is 9th of every month. If you are registered for VAT, the filing date is 20th of every month.
Ensure that the email linked to your business PIN is one that you have access to so that you are in a position to confirm everything done on iTax. Whenever a transaction is done on iTax, an email is independently sent to the default email address by the KRA system. This means that you do not have to receive confirmation from the accountant that a return has been filed or tax has been paid, because you will have received one from KRA anyway.
Do not allow your accountant to handle cash intended to pay tax. Ask for the PRN slip generated from the iTax profile and write a cheque to the KRA directly. This allows for funds traceability and avoids mismanagement.
Handling KRA audits
It is important that you handle KRA audits well because they are a common and lawful tax compliance process. KRA officials are professional and courteous and apply the law when undertaking a compliance check (desktop audit) of your business’ level of tax compliance or a full KRA audit (covering all tax heads).
The KRA will send you a letter of intention to audit, agree with you on the information and thereafter visit your offices. At your offices, kindly treat the KRA officers with courtesy, just as you would with your clients and customers.
Once the audit is complete, a letter of audit findings will be issued, followed by a discussion of the potential tax liability, a request for further information and documents. If the taxpayer and the KRA do not agree on the tax due, a confirmed assessment is issued and once the taxpayer appeals, the judicial process is dispensed with at the Tax Appeals Tribunal. The taxpayer and the KRA have an opportunity to use the Alternative Dispute Resolution (ADR) mechanism, which is conciliatory and confidential in nature, leading to a signed settlement agreement, based on the parties’ mutual agreements.
For this KRA audit process, it is best to engage the services of a tax professional to assist.
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