From Chaos to Clarity: Takeaways from the Accounting Masterclass

The Kenyan Revenue Authority (KRA) plays a crucial role in the country’s financial ecosystem, and understanding its policies and procedures is essential for any individual or business operating in Kenya.

Navigating the world of taxes can be daunting, especially with the ever-changing regulations and the recent emphasis by the Kenya Revenue Authority (KRA) on increasing tax collection. This article aims to simplify the process for Kenyan freelancers and SMEs, providing a clear and concise overview of essential tax requirements, recent developments, and valuable tips for navigating the current economic landscape.

Download the FREE checklist from our Resources page.

Recent Developments and Emphasis on Transparency:

The KRA has set ambitious targets for tax collection, aiming to raise Ksh 3 trillion in the 2024/25 fiscal year and has implemented several new measures to achieve this:

• External and bank treaties: These partnerships allow the KRA to monitor income streams from various sources, including freelancer platforms, multinationals, and local banks.
• MPesa monitoring: The KRA has partnered with Safaricom to track mobile money transactions, ensuring transparency in financial activities.

It’s crucial to remember that the KRA emphasizes clarity and transparency in all financial dealings. This includes separating personal and business finances, even if you use the same accounts.

Essential Information for Individuals and Businesses:

• Register on the ITAX portal: Familiarize yourself with the platform and understand your tax obligations.
• Know your field tax agent: This agent is assigned to your PIN and can assist you with tax-related matters.

Individual Tax Returns:

• Filing: Annually, for the period January to December. Deadline: June
• Format changes: The format for 2023 returns has changed. Individuals, especially those who previously filed nil returns, are advised to consult with a qualified accountant or tax agent for guidance.
• Review ITR components: Download a sample for reference from your iTax Portal
• Essential documents: Gather documentation for all income and expense transactions related to your freelance work.
• Tax obligations: You can determine your tax liabilities by checking your PIN certificate. Applicable taxes include:

• • Income tax: 10% – 35% based on your income bracket
  • Withholding tax: 5% for invoices exceeding Ksh 24,000
  • VAT: 16% for earnings above Ksh 5 million annually
  • Excise and Import Duty: varies based on item value

Business Tax Returns:

• Filing: Annually, for the period January to December. Deadline: June
• Format changes: Similar to individual returns, the format for 2023 business returns has changed. Consulting with a professional is recommended, especially for businesses that previously filed nil returns.
• Review Annual Return components: Download a sample for reference from your iTax Portal
• Essential documents: Maintain proper records of all income and expense transactions for your business.
• Tax obligations: Your PIN certificate will indicate your applicable taxes, which may include:

• • Corporation tax: 30%
  • Withholding tax: 5%
  • Excise and Import Duty: varies based on item value
  • VAT: 16% for earnings above Ksh 5 million annually
  • Turnover tax: 3% on gross sales – for businesses earning between Ksh 1 million and Ksh 50 million annually
  • ETIMS registration: Required for businesses earning over Ksh 5 million
  • Employee taxes (payable monthly, per employee, once the business is in good standing):
    • • Pay As You Earn (PAYE): 10% – 30% of gross salary (depending on the income bracket)
      • National Hospital Insurance Fund (NHIF): Ksh 150 – Ksh 1,700 (depending on the income bracket)
      • National Social Security Fund (NSSF): 6% on pensionable earnings (with an additional 6% contribution from the employee, subject to a ceiling of Ksh 2,160)
      • National Industrial Training Authority (NITA): Ksh 50
      • Affordable Housing Levy: 1.5% of gross salary (currently on hold)

Maintaining Transparency and Record Keeping:

Maintaining clear and transparent financial records is crucial, separating personal and business transactions even if using the same accounts. This ensures accurate tax filing and avoids potential complications.

Partnering with an Accountant is More Than Just Hiring an Employee

• Strategic Accounting: A true partner goes beyond data entry and record-keeping. They become an extension of your team, working collaboratively to align your accounting practices with your long-term goals. This proactive approach ensures your financial strategy supports your vision for the future.
• Creative Problem-Solving: Beyond routine tasks, a partner accountant brings a problem-solving mindset to the table. They anticipate potential challenges, such as currency fluctuations or evolving regulations, and offer proactive guidance to navigate these complexities. This forward-thinking approach helps you mitigate risks and capitalize on emerging opportunities.
• Honesty and integrity: Honesty and integrity are paramount in any financial partnership. A reliable accountant upholds the highest ethical standards, ensuring your financial decisions are made with transparency and compliance in mind. They avoid shortcuts that could compromise your financial well-being and guide you toward sustainable, long-term success.

Hellen’s Tips for the Current Economy:

• Diversify your income streams: Reduce reliance on a single source of income to mitigate risk.
• Explore production activities: Consider growing your food or creating products to reduce costs and potentially generate additional income.
• Embrace sustainability: Implement sustainable practices in your home and business to minimize operational expenses.
• Identify market gaps: Find problems you can solve through your skills or services to generate revenue.

FAQs:

• Does everyone have to register for VAT? Not mandatory whether you are a business or individual until your earnings reach Ksh 5 million annually. Voluntary registration is possible, however, it requires filing nil returns until the threshold is met.
• As a start-up, do I have to pay employee taxes? These taxes are payable only when your business is established and can consistently fulfill these obligations.
• How can I verify my tax obligations? You can confirm your tax liabilities through your PIN certificate. Individual PINs begin with “A,” while business PINs start with “P.”
• What happens if someone asks me for an ETIMS invoice or VAT certificate if I’m not registered? Issue them an invoice from your accounting system and DO NOT include VAT.
• As an unregistered online business, am I required to file tax returns? While formal registration with the KRA is not mandatory for businesses with earnings below the Ksh 5 million threshold, filing tax returns remains obligatory. The KRA actively monitors income streams through various channels, including bank transactions and mobile money platforms like MPESA. To ensure compliance and avoid potential issues, these businesses must maintain transparent financial records and accurately declare all business income and expenses.
• As a freelancer working on online platforms, do I need to file tax returns? As with unregistered businesses, freelancers operating on online platforms are subject to tax filing requirements, regardless of their registration status. The KRA receives withholding tax information from many global platforms, indicating income earned by Kenyan freelancers. Therefore, even if the platform itself doesn’t withhold tax, freelancers are responsible for declaring their income and paying any applicable taxes directly to the KRA.

Conclusion:

Understanding and complying with tax regulations is crucial for both individuals and businesses in Kenya. By familiarizing yourself with the essential information, consulting professionals when needed, and adopting sustainable practices, you can navigate the current economic climate with greater confidence. Remember, transparency and accurate record-keeping are key to avoiding any potential issues with the KRA.

This blog post was created in collaboration with Hellen Auma, a dedicated and experienced accountant passionate about empowering businesses. The information provided is accurate and reflects the latest Kenyan tax regulations as of February, 2024.

Disclaimer:

This article provides a general overview and should not be considered as tax advice. Please consult with a qualified accountant or tax professional for personalized guidance regarding your specific tax situation.

For personalized guidance and support navigating your specific tax situation, feel free to connect with Hellen Auma on the Job Guru Africa website.