VAT tax is one of the most important business taxes in Kenya. It contributes heavily to the Kenyan economy, and various kinds of enterprises are expected to remit their VAT every month. Although it’s one of the simplest income taxes, many businesses make avoidable mistakes that lead to overpayment, underpayment, penalties, and interest.
The mistakes can also be a cause for KRA audits, which are seen as punitive and invasive. The mere thought of a KRA audit sparks anxiety for many business owners. This post seeks to identify the top mistakes businesses make during VAT filing in Kenya. We will also tell you how to avoid them to stay compliant, save on taxes, and avoid KRA penalties.
What is VAT Filing in Kenya?
Value Added Tax (VAT) is a tax imposed on goods and services whenever value is added to them during the production and supply chain. There are various tax points from production to consumption, including import, supply, transport, and sale to the final consumer. In Kenya, any trader whose annual turnover is Ksh. 5,000,000 and above is required to pay a VAT tax to KRA and file timely returns. Businesses making less than the above amount can also opt to register for VAT. The VAT due date is the 20th of the following month. Failure to pay and file tax returns by the deadline attracts a penalty of Ksh. 10,000 or 5% of the tax due. Read our detailed guide on filing auto-populated VAT returns for a deeper understanding of VAT in Kenya.
Key VAT Terms: A Quick Glossary for Businesses to Avoid VAT Filing Mistakes
You’ll come across these terms when filing VAT returns in Kenya. Here’s a quick overview of what they mean:
- Input VAT: This is the VAT you pay on purchases as well as other expenses that can be claimed against the output VAT.
- Output VAT: This is the VAT a business charges on the sale of goods and services.
- Reverse VAT: This is the VAT a business pays as the recipient of imported goods.
- ETR: Electronic Tax Register is a device that Kenyan businesses use to generate KRA-compliant tax invoices.
- TIMS: Tax Invoice Management System (TIMS) is a KRA software that ensures automatic reporting of invoice transactions to ensure ETR invoices are transparent and accurate.
- Exempt Supplies: These are goods and services that are not subject to VAT
- Zero-rated Supplies: These are goods and services that are taxed at a 0% VAT rate.
- Nil Returns: VAT returns made even without taxable transactions/supplies during a tax period. Even if you don’t make a sale, supply goods, etc, you need to file a nil return as VAT VAT-registered business.
Top Mistakes Businesses Make During VAT Filing in Kenya (And How to Avoid Them)
Here are the top mistakes businesses make while filing VAT returns and how to avoid them:
Incorrect Calculations
Incorrect calculations impact your business in many ways. These include overpayments of VAT, penalties, and interests, risk of audits, and tainting of reputation.
How to Avoid: Luckily, Kenyan businesses can use KRA-approved ETR machines and TIMS software to automate transactions and invoices. You can go a step further by hiring professional accountants or tax consultants to handle your VAT returns and payments.
Late VAT Filing and Payment
As a business owner, it’s your duty to file and pay your VAT returns on time. Don’t let cash flow problems or forgetting deadlines lead to late payments. You’ll end up losing more money in penalties and interest and ruining your business’s reputation.
How to Avoid: Please set aside VAT collections early enough to avoid using the money for other business expenses. Also, create a VAT tax calendar with reminders to ensure you pay taxes and file returns on time.
Poor Record Keeping
Businesses must keep accurate records and documents for the purpose of VAT filing. These include sales and purchase invoices, credit and debit notes, iTax portal login details, and import and customs documents. Failure to do so will affect the VAT filing process.
How to Avoid: Maintain properly organized records, be it financial, importation, tax, or other business transactions. Also, conduct independent document audits to ensure all required files are available.
Using Outdated ETR Machines
In 2020, KRA made it mandatory for all VAT-registered businesses to update from the older ETR machines to the new models that conform to the new Electronic Tax Invoice (ETI) regulations. If your business is using outdated machines, it may cause compliance issues with KRA.
How to Avoid: Upgrade to a KRA-approved ETR Machine that meets the new ETI regulations.
Failure to Pay Reverse VAT
All businesses importing taxable services are required to pay a reverse VAT, also called VAT on Imported Services. Some businesses in this sector fail to identify this obligation due to ignorance and a lack of knowledge. This could lead to harsh tax penalties.
How to Avoid: Identify taxable imported services, register for VAT, and file returns as required.
Failure to De-Register for VAT
You should deregister for VAT when your business continuously falls below the provided KRA threshold (Ksh. 5 million annual turnover). Additionally, businesses that are closing down should deregister for VAT. Failure to deregister for VAT leads to accrued penalties and interest.
How to Avoid: Monitor your annual turnover to ensure you are still eligible for VAT. If not, deregister for VAT. If you go out of business, remember to deregister for VAT.
Incorrect Input VAT Claim
Some businesses, knowingly or unknowingly, claim ineligible Input VAT such as personal expenses, passenger vehicles, exempt supplies, and unverified invoices. Doing this may lead to tax assessments, audits, and cash flow issues.
How to Avoid: Understand KRA’s rules and regulations on VAT Input Tax. Also, separate your business and personal expenses.
Failing to File Nil Returns
Just like any other income tax, you are supposed to file a Nil return if your business didn’t have any taxable income in a particular tax period. Failure to file the returns leads to penalties and interest.
How to Avoid: Always file your VAT returns before or on the 20th of the following month, even if they are Nil returns.
Wrapping Up
We’ve discussed the top mistakes businesses make during VAT filing in Kenya. Avoid these mistakes to ensure compliance, streamline your business cash flow, and prevent costly penalties. Keep up with changes and updates in the VAT landscape to stay compliant. If you need professional assistance, Gichuri & Partners is your go-to tax consultant in Kenya. Contact us anytime for expert guidance.
