In Kenya, individuals and business owners typically file two main types of tax returns: Income Tax and VAT (Value Added Tax). Income Tax returns are filed annually and are mandatory for all taxpayers. VAT, on the other hand, is declared monthly and is only compulsory for businesses with an annual turnover exceeding KES 5 million; otherwise, registration is voluntary.
In this article, I’ll explain two expensive mistakes every taxpayer should avoid when filing their returns.
Counter Check The Type of Withholding Tax Client Has Withheld
When a company engages your services, they are often required to withhold tax from your payment. This typically includes both VAT and income tax, depending on the invoice you’ve issued. It’s crucial to pay close attention to these withholdings.
Be careful: some clients might mistakenly withhold 2% VAT even if you haven’t charged them VAT on your invoice. You’ll receive an email notification each time they declare this withholding. It’s crucial to cross-check these notifications immediately. If they’ve withheld 2% VAT but should have instead withheld 5% income tax, KRA will assume you did charge VAT. This could lead to KRA expecting you to pay the 14% difference between the actual VAT rate and the incorrect 2% withheld.
Failure to declare this monthly incurs a penalty of KES 10,000. Neglecting this obligation can lead to prolonged resolution efforts and prevent you from obtaining a Tax Compliance Certificate.
A crucial point to remember is that if a client withholds VAT from you when you aren’t registered for VAT obligations, it can lead to significant issues. The Kenya Revenue Authority (KRA) will likely forcefully add the VAT obligation to your account, compelling you to declare the return regardless
It’s crucial to consistently verify the accuracy of any withholding tax declared by clients on transactions you’ve completed. This proactive step helps ensure everything is correctly accounted for.
Expense Data in The Profit Loss Page
For income tax filers, particularly consultants, freelancers, and sole proprietors, the profit and loss account section on the second page of the income tax return excel sheet requires meticulous attention. Errors in data entry here can lead to significant issues.
When classifying expenses for individuals paid daily or per job, who are not permanent employees, the most accurate categorization is often Direct Wages or Contract Labor/Freelance Fees.
While “salaries and wages” typically refers to permanent employees, and “direct expenses” is a broader term, “direct wages” specifically applies when these payments are directly tied to the production of goods or services.
If they are providing services that aren’t directly part of your core product/service creation (e.g., a one-off IT fix), “contract labor” or “freelance fees” might be more appropriate.
It’s crucial to distinguish these from regular salaries and wages for tax and accounting purposes.
If you employ permanent staff in Kenya, you are required to register for P.A.Y.E (Pay As You Earn). This system mandates that you deduct income tax directly from your employees’ earnings and remit these amounts to the Kenya Revenue Authority (KRA).
It’s important to note that the PAYE rates starts from 10% for every KES 24,000 and only applies to the first KES 24,000 of monthly taxable income (or KES 288,000 annually). KRA utilizes a graduated tax scale, meaning different portions of an employee’s income are taxed at varying rates, ranging from 10% to 35%. Additionally, a monthly personal tax relief of KES 2,400 is also applied.
For accurate calculations, you’ll need to refer to the latest KRA PAYE tax bands and rates, which are subject to changes based on the Finance Act.
It’s therefore crucial to correctly categorize expenses, especially when it comes to salaries and wages. If your company doesn’t have employees, avoid listing expenses under “salaries and wages.”
Instead, these should be recorded under direct expenses (direct wages). This accurate classification will prevent issues and ensure a smoother process if the Kenya Revenue Authority (KRA) audits your tax return.
Get A Professional With Accounting Background to Assist
For those new to income tax filing, don’t hesitate to visit your local KRA office where you can get direct assistance with your return.
If you have numerous transactions, it’s highly advisable to consult a professional accountant to assist with your tax filings. While there’s a fee involved, their expertise can save you a significant amount of time and eliminate potential headaches.
Conclusion
We all learn from our mistakes, and when it comes to tax returns, some lessons can be quite expensive. I’ve identified two common and costly errors that taxpayers frequently make. Failing to avoid these can lead to the denial of a Tax Compliance Certificate, a document often required by businesses and organizations before considering you for work.
And that is it from me here. Are there any other costly mistakes that people should watch out for? let me know in the comments section below.
If you need content creation and content marketing services, do not hesitate to reach out to me here.
Up until next time, bye and take care.
Follow me on social media @cheptionymutai.
