KRA Tax Audit Checklist for SMEs in Kenya

The KRA Tax Audit Checklist for SMEs in Kenya. Small and medium enterprises (SMEs) are usually on KRA’s radar more than large corporations for several reasons. Firstly, SMEs lack the resources to have an in-house accounting and tax department to put their financial and tax affairs in order.

Secondly, SMEs in Kenya are frequently in the spotlight for KRA audits due to enhanced digital surveillance through the Electronic Tax Invoice Management System (eTIMs). Lastly, most SMEs are non-compliant with taxes due to costs, limited tax information, and complex tax procedures. This puts them on the wrong side of tax laws, consequently triggering KRA tax audits and assessments.

Therefore, for most SMEs, KRA audits are not a matter of if they will happen, but when they happen. Business owners must anticipate these audits and be fully prepared when they happen. We’ve already tackled what every business owner should know when preparing for a KRA tax audit. This is not a repetition, but a quick, SME-specific KRA tax audit checklist.

The KRA Tax Audit Checklist for SMEs in Kenya

Quick Reference Table

Want to know what items the KRA auditors focus on? Here is the KRA tax audit checklist for SMEs in Kenya:

1.     Tax Registration

When KRA lands in your premises or sits down to desk-audit your business, they start with the basics: registration. Is your business a sole proprietorship or a limited company? Do you have a KRA PIN? What taxes is your business registered for (VAT, PAYE, Withholding Tax, Income)? Another thing they check is business operations. Did you register to provide one activity but are providing another? Any inconsistencies in this stage will trigger a deeper audit.

2.     Filed Tax Returns

Your filed returns must match the financial reality of your business. When KRA reviews your tax returns, they compare them to:

• Bank statements.
• Mobile money (M-Pesa) till and paybill statements.
• Point of Sale (POS) records and cash summaries.

Red flags to watch out for here include:

• VAT returns that aren’t consistent with the sales.
• NIL returns during a period where income was generated.
• Unexplained drop in turnover tax returns.

Consulting with a tax consultant before a KRA audit can help you identify these gaps and rectify errors, changing the trajectory of the audit.

3.     Sales Records

Sales records are where SMEs win or lose an audit. Make sure the sales receipts, invoices, sales summaries, and actual cash flow are consistent. Most businesses in Kenya deal with both cash and cashless transactions, so ensure all records reconcile.

4.     Expenses

Unsupported expenses will raise red flags during an audit, and KRA doesn’t allow unsupported expenses. Be ready to show how the expenses are related to the business and are allowed. Practical tips to ensure expenses are defensible include:

• Having receipts and invoices for all expenses.
• Making sure all claimed expenses are business-related and not personal.
• The value of these expenses is reasonable for the size of your SME.

If you can’t support your expenses, KRA will likely impose an additional tax assessment.

5.     Payroll and PAYE Records

Is your SME large enough to have employees? Is their income taxable? Do you deduct PAYE and remit it to KRA as expected? KRA will ask for your payroll records. These include:

• Payroll schedules.
• Statutory deductions records (NSSF, SHIF, PAYE, etc).
• Employment contracts.
• Staff salaries records.

Maintaining these records is crucial. If you can’t do it yourself, outsource to a professional payroll service provider.

6.     Withholding Tax

SMEs are expected to withhold taxes when they make certain payments, such as to suppliers, landlords, and consultants. Forgetting to withhold taxes may prompt KRA to disallow expenses and consequently apply additional tax assessments. As an SME, always:

• Deduct withholding tax on rent, consultancy, professional fees, and other services.
• Remit withholding taxes on time.
• Issue withholding tax certificates to the relevant partners.

KRA focuses on withholding tax when auditing SMEs because it’s a high-risk area for revenue leakage. Don’t be the source of this leakage. Instead, do your part to ensure tax compliance for all parties.

7.     Past KRA Correspondence

Before a KRA audit, KRA tries to resolve any issues as soon as they appear. They will issue demand letters, iTax notifications, and emails to try to resolve the matter before it escalates. If you’ve engaged with KRA at any capacity, keep these correspondences organized and safe. Have clear and unaltered copies of:

• Demand letters
• Emails
• System notifications
• Objection decisions
• Compliance with previous instructions from KRA.

KRA checks these engagements to determine your level of cooperation. Ignoring past issues is a red flag during a KRA audit and may escalate the issue.

8.     Bank Records

Bank-led KRA audits are common among SMEs. Banks and SMEs have a close relationship, with SMEs going to banks to access working capital, manage cash flow, and save their daily income.  KRA monitors this relationship, and any discrepancies might trigger a financial audit. Keep your bank statements and other relevant documents organized, and be ready to explain the following:

• Large and unusual deposits.
• Loan from third parties.
• Money transfers between business and personal accounts.
• Owner capital injections/contributions.

Final Thoughts

Tax disputes between KRA and SMEs are rarely caused by deliberate tax evasion or non-compliance. Instead, it stems from data discrepancies, poor bookkeeping, and mixed finances. This KRA tax audit checklist for SMEs in Kenya will help you spot and rectify gaps early before a tax audit turns into a dispute.

It will also help you know when to seek professional tax audit representation to resolve compliance issues. If you need KRA audit services or internal audits/review, contact Gichuri & Partners. We are your reliable partner in all tax matters, from tax filing to audits and KRA dispute resolution.