Micro and small enterprises experience various challenges that hinder their tax compliance. These include invalid tax registration status and lack of expertise to assist them comply with the tax requirement. Nevertheless, they can enhance their compliance through various ways
1. Timely obtaining of a PIN Certificate
Obtaining a Personal Identification Number (PIN) Certificate is a legal obligation for all individuals and companies doing business in Kenya. Some enterprises use individual accounts to circumvent this which may present difficulties in future where a business that has been operating needs to regularise its tax registration status. This can lead to loss of business opportunities which can be avoided by obtaining a PIN in good time.
2. Validation of the Tax registration Status
It is common to find businesses registered for VAT obligations while they have not met the stipulated threshold and/or other registered for PAYE while they have not employed any staff. In addition, financial year end as indicated in the PIN may differ from the business accounting year end. This may result in tedious work of preparing two sets of accounts. Businesses should check if the registration status complies with their needs and where necessary seek an amendment of the status. The KRA itax portal has a provision for amendment of status with the tax payer only being required to provide the supporting document to justify the amendment.
3. Proper Accounting and Book keeping
Compliance demands accurate maintenance of accounting records. Documentation such as invoices and receipts for both income and payments, records on assets including physical assets, debtors and creditors should always be up to date. Micro and Small Enterprises can outsource bookkeeping services for as low as KES 5,000 per month. Most consultants guide the business owners on how to maintain records albeit in raw form from which accounting records are drawn.
4. Timely deduction and remittance of withholding taxes
Withholding and remittance of withholding taxes (WHT) is critical for all businesses. WHT is charged at rates ranging from 3% to 25% depending on the nature of transaction and residency status. Some transactions for which business should deduct WHT include payments to resident contractors (3% of gross amount) and payments to consultants (5% of gross amount). Businesses should review the nature of their suppliers and payments to check if withholding taxes are deducted. One ascertained, they should consistently comply.
5. Taking advantage of the various tax reliefs
KRA provides for various reliefs in form of wear and tear allowances and various capital deductions. Capital allowances are necessary as businesses are not allowed to deduct the cost of purchasing assets during the year of purchase. Businesses should keep accurate record of their assets and disclose them appropriately so as to be able to benefit from the applicable tax reliefs.
6. Timely and accurate filing the statutory returns
Timely and accurate filing of returns helps avoid penalties and guard against inconsistencies that may arise when comparing annual tax returns against monthly returns. It is common to find annual returns capturing significant staff expenditure in form of salaries yet lack PAYE tax obligation. Such inconsistencies expose business to penalties and interests that could end up affecting business operations.
7. Close liaison with suppliers
Small businesses often work with suppliers who seek to irregularly reduce their tax obligations through manipulation of their sales figures. When documentation is inconsistent with requirements of the taxman; it causes difficulties while claiming input taxes and filing VAT. Small business must consistently liaise with suppliers to ensure valid documentation is provided.
8. Deactivation of inapplicable tax obligations
Businesses should deactivate tax obligations inapplicable to them to minimise cost of filing nil returns, and eliminate exposure in form of fines and penalties when such tax returns are not filed. Activation of tax obligations can be done when a business meets the stipulated thresholds.
9. Seeking waivers on penalties and interests
Past mistakes leave business owners uncertain on how to address them. Fortunately, KRA provides a mechanism for seeking waivers and penalties. Currently the 3 year (1st Jan 2021 to 31st Dec 2023) Voluntary Tax Disclosure Program (VTDP) will have undeclared incomes for the period from 1 July 2015 to 30 June 2020 granted waiver on penalties and interests. Micro and small enterprises can with support of tax consultants process the request for waivers.
10. Seeking a Tax Compliance Certificate
This is issued by the commissioner ascertaining that a tax payer has complied with filing of tax returns and remittance of the taxes. Small and Medium Enterprises should maintain a valid tax compliance certificate as it may be required while bidding for business opportunities and is a demonstration of a healthy tax position.
Kaniu Samuel Njoroge (CPA) member of the Institute of Certified Public Account managing partner S.N KANIU AND COMPANY. Email: firstname.lastname@example.org