Can the KRA Pursue Company Directors Personally for Unpaid Tax? Most company directors assume that the corporate structure of their company gives them immunity from the Kenya Revenue Authority (KRA). While a limited liability company is a separate legal entity from its directors and shareholders, KRA has gone after the directors in the past, won some, and lost some of the cases.
The Tax Procedures Act provides circumstances under which KRA is allowed to go after the personal assets of company executives to recover unpaid taxes. So, generally, yes, KRA can pursue company directors personally for unpaid company tax. However, being a director of a business doesn’t automatically make you liable for the tax debt. If your company has unpaid corporation tax, VAT, or PAYE, you need to understand the circumstances under which KRA can pursue your personal assets. You also need to know the protections provided by the law and what you can do to reduce your exposure.
Can KRA Go After Your Personal Assets for Company Tax?
Yes, KRA can go after your personal assets for unpaid company tax, but there is a catch. The tax authority must establish a lawful basis for doing so, as provided by Section 18 of the Tax Procedures Act. Section 18 states that company officers may face personal liability where they enter into arrangements that leave the company unable to meet its tax obligations.
“Where an arrangement has been entered into by any director, general manager, company secretary, or other senior officer or controlling member of the company with the intention or effect of rendering a company unable to satisfy a current or future tax liability under a tax law, every person who was a director or controlling member of the company when the arrangement was entered into shall be jointly and severally liable for the tax liability of the company.” – Section 18 (1) of the Tax Procedures Act, 2015.
So what are some of these arrangements that can make you personally liable as a company director?
- Transferring company assets to a connected party.
- Restructuring the company’s affairs in a way that prevents tax recovery.
- Phoenixing- deliberately closing down or liquidating a company and opening another one in the same business.
- Failing to remit statutory deductions like PAYE.
- Misuse of the corporate veil through fraudulent activities.
However, Section 18 provides directors with a defense against KRA. If you, as a director, didn’t derive any financial or other benefit from the above activities/arrangements, KRA cannot pursue you personally. However, you must meet one of the following conditions:
- You must have notified the company in writing of your opposition upon discovering the arrangement and notified the KRA Commissioner.
- You must have been uninvolved in the executive management when the company entered the arrangement, were unaware of it, and have reasonable grounds for why you were unaware of it.
You can’t simply claim ignorance after the event and expect the law to protect you. You must document your objection, write to the KRA Commissioner, and seek legal advice to avoid being personally liable for company tax noncompliance. Under Section 103 of the same Act, corporate officers can be held liable for the company’s tax offences. “Where a company commits an offence under a tax law, the offence may be attributed to specified individuals who held relevant positions at the time, including the chief executive officer, managing director, director, company secretary, and treasurer.”- Section 103 (2) of the Tax Procedures Act.
Clause 3 of Section 103 also provides a defence for corporate officers against KRA. These include:
- The offence was committed without your knowledge or consent.
- You exercised proper oversight and reasonable due diligence to prevent the commission of the offence, with regard to your functions and all the circumstances.
Director Liability for Unpaid VAT in Kenya
KRA is very keen on businesses that collect VAT from customers but fail to remit it. If you incorporate the collected tax into your business cash flow to pay suppliers, employees, or other expenses, you risk VAT non-compliance. Normally, KRA stays out of personal accounts when it comes to VAT tax debts. Enforcement is applied to business accounts. However, if the VAT non-compliance is deliberate, say through asset transfers, concealment of transactions, or false returns, KRA may come for your personal accounts. That said, not every unpaid VAT warrants KRA to hold the director liable. The tax authority must demonstrate a legal basis for pursuing your personal assets.
Director Liability for Unpaid PAYE in Kenya
The same criteria apply to company directors and business owners who deduct PAYE and other deductions, like the Affordable Housing Levy, from employees but fail to remit them to KRA. While it’s not automatic that KRA may pursue the employer’s personal assets, the recovery route might lead to personal liability. However, this depends on the circumstances and applicable law.
How to Reduce the Risk of Personal Tax Liability as a Director
While the fundamental “separate legal entity” principle largely protects you from being personally liable for company taxes, KRA may pierce through that corporate veil if the structure is misused or tax is deliberately evaded. Here are the actions to take as a director to reduce your personal tax exposure:
- Monitor Tax Compliance: You may delegate filing taxes and all other compliance activities to an accountant (internal or external), but at the end of the day, you need to review them. Ensure the VAT, PAYE, and Corporation taxes are paid and returns filed.
- Separate Company and Personal Finances: Avoid mixing business and personal finances. Avoid transferring company assets to yourself, shareholders, or related businesses. If you do, ensure it’s a legitimate and documented undertaking.
- Document Your Oversight: In case of a tax dispute with KRA, your defence is what you did to prevent non-compliance as a director. Therefore, document every meeting, every decision, and every resistance. Keep your board minutes, tax reports, payments, and correspondence with accountants and other stakeholders.
- Act Promptly When Tax Issues Arise: Once you are made aware of tax issues such as disputed tax assessments, inability to pay taxes, or outstanding liabilities, act promptly. Assess the available options, such as legally disputing the assessment or seeking a flexible payment plan.
- Don’t Ignore KRA Notices: If a KRA notice mentions you personally, address it promptly. Seek professional tax advice to establish the legal basis of the notice, your options, and your timelines. Don’t assume that resigning as a director will automatically protect you.
- Avoid Fraudulent Tax Practices: Phoenixing and fraudulent deregistration of a company to evade tax debt will expose you to personal liability. Execute a fair liquidation and follow formal deregistration paths if you want to dissolve your company.
What To Do If KRA Pursues You Personally for Company Tax
Have you received a demand notice from KRA for company tax? Don’t assume that you’re not liable. Instead, take the following steps:
- Establish Why You Are a Target: When KRA issues a demand notice or tax assessment, they explain the legal basis/provisions under which they are taking that step. They may quote Section 18 of the Tax Procedures Act, refer to an offence under Section 103, or any other legal implication. Review it carefully and request clarification from KRA if it’s unclear.
- Check the Facts: Verify your tax records, tax assessments, payment records, and financial transactions. You might want to bring in an external auditor for this process to help you understand what happened, who authorized it, and how you’re involved.
- Challenge the Demand: If you have sufficient grounds to disagree with the KRA tax demand notice, file a notice of objection. This is another stage where professional assistance is recommended.
- Stop the Tax Exposure: Stop company arrangements or activities that frustrate tax recovery. Don’t use withheld PAYE and VAT in business transactions without considering the company’s tax obligations.
Final Thoughts
KRA can pursue company directors personally for unpaid debt under specific circumstances. While the company structure generally protects the director from personal tax liability, the Tax Procedures Act gives various provisions under which a company officer, including a director, may be liable. These include participating in or being aware of certain arrangements that leave a company unable to meet its tax obligations and tax offences attributed to the company leadership. Therefore, KRA can’t go after your personal assets just because you’re the company director. They must establish a legal basis before taking that action. If KRA goes after your personal assets for unpaid company tax, establish a legal basis and seek professional support before responding.
