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UNDERSTANDING VAT IN KENYA NOVEMBER 2009

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Understanding VAT in Kenya

Contents

Page No.

1.

Basic Concepts of VAT

2.

Registration, Deregistration and Changes in Particulars

3.

Supplies of Goods and Services

4.

Place, Time and Value of Supplies

10

5.

Output Tax

12

6.

Input Tax

16

7.

VAT Remission

19

8.

Records, Returns and Refunds

20

9.

Collection, Remission, Recovery and Refund of Tax

23

10.

Offences and Penalties

26

11.

VAT Audit

28

12.

Assessments, Objections and Appeals

29

Caveat

29

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Understanding VAT in Kenya

1. BASIC CONCEPTS OF VAT 1.1. INTRODUCTION The Kenya Value Added Tax Act (Cap 476) was enacted in 1989, with a commencement date of 1st January 1990. VAT was introduced to replace sales tax which had applied mainly to manufacturing entities. VAT is an indirect tax on expenditure in the domestic economy rather than a tax on the output of the domestic economy. 1.2. BASIC CONCEPTS OF VAT VAT is levied on: the supply of goods or services, where it is a taxable supply made by a taxable person in Kenya in the course of or in furtherance of any business; or the importation of taxable goods or services into Kenya. VAT is payable by: the taxable person making the taxable supply; the importer of imported goods; or the recipient of imported services. A taxable person is one who makes or intends to make taxable supplies while he is registered or required to be registered under the VAT Act. The following supplies fall outside the scope of the VAT system: a) The supply of goods to a bonded warehouse in Kenya; b) Employment services rendered by an employee to an employer in consideration for a wage or salary; c) The transfer of a registered business as a going concern provided an application has been made to the Commissioner, as prescribed in the VAT regulations; and d) Supplies made by a person who is not required to register for VAT, e.g. where the turnover is below the VAT registration threshold. VAT is calculated on the basis of invoices issued at each point in the supply chain.

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2. REGISTRATION, DEREGISTRATION AND CHANGE IN PARTICULARS 2.1. REGISTRATION Registration, de-registration and changes affecting registration are dealt with in the Sixth Schedule to the VAT Act. 2.2. TYPES OF REGISTRATION 2.2.1. Compulsory Registration Compulsory registration applies to any person who in the course of his business has supplied or expects to supply taxable goods or services exceeding the value of Kshs 5.0 million in a twelve month period. Prior to 1st January 2007, the threshold was based on the value of which in any of the following periods exceeds: Kshs. Twelve months 3,000,000 Nine months 2,400,000 Six months 1,800,000 Three months 1,200,000 Prior to June 2007, registration was required for designated goods and services irrespective of turnover. Designated goods or services are those that are subject to VAT without reference to turnover limits. This requirement is now not applicable. 2.2.2. Voluntary Registration Voluntary registration is permissible under the law and is granted at the discretion of the Commissioner. It is important to evaluate the cost and benefit of registration before a person applies for voluntary registration. The benefits are that: i) one is able to recover the whole or part of the VAT charged by suppliers as input tax. This will reduce the cost of inputs, leading to improved profits and competitive pricing; and ii) the registered person can issue tax invoices to his customers who can then claim the VAT charged as input tax. 2.2.3. Group Registration A group of companies which is owned or substantially controlled by another person, subject to the discretion of the Commissioner, may apply to be registered and treated as one person. The effects of group registration are that: any supply between the group companies will not attract VAT as it will be treated as a nonsupply; and all members of the group are jointly and severally liable for any tax due from the group. In the absence of a group registration, all taxable transactions between group companies are subject to VAT.

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The Commissioner may cancel a group registration by giving thirty days notice to each of the group companies if he is satisfied that: the registration is a risk to revenue; one of the companies in the group has ceased to make taxable supplies; or the person in whose name the group is registered no longer owns or controls the group. 2.2.4. Registration of Non-Residents A non-resident business who supplies taxable goods or services through a permanent establishment or a branch in Kenya is required to obtain registration through a resident representative. Moreover, where the supplier of the service is a resident outside Kenya, the Commissioner may by notice in writing appoint a person who is normally resident in Kenya, as an agent for collecting the tax payable on the service and remitting it to the Commissioner. 2.3. APPLICATION FOR REGISTRATION Any person who meets the registration requirements herein above is construed to be a taxable person, who should, within thirty days of becoming a taxable person, apply for registration. The registration certificate is to be issued within ten working days after receipt by the Commissioner of the application. Where an application for registration is made within thirty days of becoming a taxable person, the effective date for registration is deemed to be the 30th day from the date the person became a taxable person. However, the Commissioner has the discretion to vary the effective date. Every registered person is required to display the registration certificate in a clearly visible place in his business premises. Where a person has more than one place of business, certified copies (certified by the Commissioner) must be displayed in each of those places. 2.4. PRE-REGISTRATION INPUT VAT On the date of registration, where a person has stocks on which VAT had been paid and which are intended for use in making taxable supplies; or has constructed a building or civil works or has purchased assets for use in making taxable supplies, such a person may within sixty days (prior to 12th June 2009 - thirty days) of registration or such longer period as allowed by the Commissioner, claim the input tax charged thereof. Input VAT can be claimed on purchases done within twelve months preceding registration, however, the Commissioner is empowered to extend this to twenty four months. 2.5. DEREGISTRATION A person may apply to be de-registered if the taxable turnover of goods or services in a period of twelve months does not exceed Kshs. 5 million; and it is not expected to increase in the next period of twelve months. Such a person is then required to be subject to turnover tax. A person applying for de-registration should notify the Commissioner of the value of his supplies in the relevant periods and the description and value of taxable materials and other goods in stock.

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If the Commissioner is satisfied that the registered person should be de-registered, he will do so from the date when that person pays the tax due in respect of goods and materials on which tax has not been paid or input tax has been claimed. In practice, the Commissioner will conduct a VAT audit before granting de-registration. 2.6. POST-REGISTRATION VAT Where a person ceases to make taxable supplies, he must notify the Commissioner immediately of the date of cessation and submit a return showing details of materials and other goods in stock and their value and refund any input VAT claimed on such goods within thirty days from the date he ceased to make taxable supplies. Where a person disposes off a registered business as a going concern to another registered person, and wishes to do so without charging VAT on the assets and stocks being transferred, both persons must, within 30 days, provide the Commissioner with details of the description, quantities and values of assets and stock of taxable goods on hand at the date of disposal. They should also provide details of the arrangements made for transferring the responsibility for keeping the records and producing books of the business for the period before disposal. Where the Commissioner has any objection, he will notify the taxpayers within 14 days, failing which the application is deemed to be accepted as long as it complies with the requirements. The purchaser will therefore not claim input VAT on such assets and stock. 2.7. CHANGE IN PARTICULARS A registered person is required to notify details to the Commissioner within fourteen days of the following changes: change of address of the place of business; additional premises to be used for the purposes of the business; premises used for the business ceases to be used; business or trading name changed; an interest of more than thirty percent of the share capital of a limited company has been acquired by a person or group of persons; the person authorised to sign returns is changed; the partners in a partnership are changed; and a change in the trade classification or the goods or services supplied.

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3. SUPPLIES OF GOODS AND SERVICES VAT is chargeable on the supply of goods and services, including anything treated as a supply of goods or services, in Kenya, where the supply is a taxable supply and the goods or services are supplied by a taxable person in the course of or in furtherance of a business carried on by him. VAT is also charged on the importation of goods and on the importation of services. The VAT on importation of goods is payable together with the customs duty at the point of entry. For importation of services, the liability is borne by the recipient of the service, and if the recipient is a taxable person he will recover the VAT paid as input tax. However, if the recipient is not a taxable person the VAT incurred will be an additional cost. 3.1. SUPPLY OF GOODS A supply of goods includes: the sale, supply or delivery of taxable goods to another person; the sale or provision of taxable services to another person; the appropriation by a registered person of taxable goods or service for his own use outside of the business; subject to certain exceptions, the making of a gift or providing samples of any taxable goods or taxable services; the provision of taxable services by a contractor to himself in constructing a building and related civil engineering works for his own use, sale or renting to other persons; the letting of taxable goods on hire, leasing or other transfers; the appropriation by a registered person of taxable goods or services for use in the business where if supplied by another person, the tax thereon would have been excluded from the deduction of input tax; or any other disposal of taxable goods or provisions of taxable services. Prior to June 2007, insurance proceeds for loss of taxable goods and supplies were deemed to be a supply. This is now no longer the case. With effect from 12th June 2009, a taxable invoice for supply on credit must be issued at the time of supply and not as previously that was within 14 days of supply. Taxable goods, means electricity and all goods other than those specified in the Second Schedule (Exempt Goods). Sale in relation to any goods means: any transaction whereby the goods are delivered by one person to another person pursuant to a contract of sale or other disposal whereby the ownership in the goods has passed or will pass to the person to whom the goods are delivered or to any other person for whom such person is acting as an agent; or any transaction whereby one person passes the possession of the goods to any other person under an agreement, whether oral or in writing, which provides for the purchase of the goods by the person to whom the possession thereof is delivered, or which provides that the property in the goods will or may pass to that person on the happening of any event; or

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any transaction whereby the owner of the goods delivers to any person the possession of the goods on hire or any other arrangements whatsoever, which permits the person to whom the possession is delivered to use the goods for his own purposes or for the purposes of any other person whether for any specified period or indefinitely, and whether or not that person is required to give the owner any consideration for the use of the goods by him or by any other person; or any use of the goods for his own purposes, by the registered person, or any other person liable to pay tax. 3.2. SUPPLY OF SERVICES Services are deemed to have been supplied in Kenya and not as services exported outside Kenya where: i) the supplier has established his business or has a fixed physical establishment in Kenya and the services are physically used or consumed in Kenya regardless of the payers location; or ii) in connection with immovable property, the place where the property is situated is in Kenya; or iii) the service is in connection with a person receiving a signal or service for the supply of television, radio, telephone or other communication services in Kenya. In the case of transportation service, transport service is deemed to have been supplied outside Kenya where the transportation ends outside the country. 3.3. RATES FOR SUPPLIES Supplies of goods or services made by registered persons are either: standard rated; zero-rated; or exempt. The VAT system only applies to taxable supplies made by a taxable person in the furtherance of his business. Where a person makes an exempt supply, he will not be regarded as making a taxable supply. 3.3.1. Standard Rate Any goods which are not exempt or zero-rated are deemed to be taxable at the standard rate of 16% or the lower rate of 12% as stipulated under the First Schedule of the VAT Act, for example on supply of electricity. All services that are not listed in the Third or Fifth Schedules are taxable at the standard rate of 16% or the lower rate of 12% as stipulated in the First Schedule of the VAT Act. 3.3.2. Zero Rate Where a taxable person supplies goods or services and the supply is zero-rated, there are two significant consequences: no tax is chargeable on the supply; but the supply will in all other respects be treated as a taxable supply.

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Accordingly, the rate at which tax is treated as charged on the supply will be zero. In determining the registration threshold, the values of zero-rated and standard rated supplies are combined to determine whether the supplier is a taxable person who is required to be registered. Registered persons making zero-rated supplies are able to recover their input tax whilst not charging output tax, thereby usually find themselves in a refund position. Zero-rating is granted sparingly to essential goods and services. Zero-rated supplies include: goods and services exported from Kenya; supplies to designated foreign aid funded capital investment projects and Kenya Red Cross Society; supplies to EPZ enterprises, cotton ginning factories, film producers; dental, medical, veterinary and agricultural equipment and supplies; and seeds, fertilizers, pesticides and agricultural tools. Where goods and services are exported or supplied to organisations designated as zero-rated, the supplier is required to provide documented proof to justify the zero rated supplies. 3.3.3. Exempt Supplies An exempt supply is a supply of goods specified in the Second Schedule or a supply of services specified in the Third Schedule. Where a person makes exempt supplies: No tax is charged on exempt supplies. The value of exempt supplies will be disregarded in determining whether the value of supplies made by a person exceeds the annual registration threshold. No input VAT will be deductible, instead the VAT incurred will be a cost to the person. 3.3.4. Determination of Rate for Supply of imported Goods and Services VAT is chargeable if there has been a supply of taxable goods or services in Kenya, by a taxable person in the course of furtherance of a business. This means that supplies taking place outside Kenya will not be within the jurisdiction of the Kenya Revenue Authority, unless such goods or services have been imported into Kenya. In order to determine the applicable rate of tax for imported goods or services, the following procedures will apply: the services listed in the Third Schedule are exempt. Any services not listed are taxed at the standard rate; goods exempted from tax are listed in the Second Schedule to the Act; goods that are specifically zero-rated are listed in Part B of the Fifth Schedule, or Part B of the Eighth Schedule; if any goods are not specified in the schedules referred to above, then such goods and services are treated as taxable at the standard rate of tax.

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4. PLACE, TIME AND VALUE OF SUPPLIES 4.1. PLACE OF SUPPLY The place of delivery is generally accepted as the place of supply in relation to goods. However, where the goods are made or provided in Kenya or imported into Kenya, the place of supply will be in Kenya. 4.2. TIME OF SUPPLY The time of supply is technically referred to as the tax point. Generally, a tax point in respect of a supply of goods and services falls on the earliest date on which: the goods or the services have been supplied to the purchaser; an invoice is issued in respect of the supply; payment is received for all or part of the supply; or a certificate is issued by an architect, surveyor or any person acting as a consultant. The tax point in respect of imported services is the earlier of: the time when the service is received; when an invoice is received in respect of the service; or when payment is made for all or part of the service. This rule is very crucial in many business decisions and should be considered very carefully before a person enters into a sale agreement or contract. Where a supply is made on a continuous basis or by metered supply, the time of the supply is the time of each determination or meter reading. 4.3. VALUE OF SUPPLY Generally, the taxable value of a taxable supply is the price at which it is provided. Where the price cannot be determined, the Commissioner is empowered to determine it. The price will include: the cost of packaging; any other goods ancillary or attached to packaging; any other liability the purchaser has to pay to the vendor in addition to the price charged such as warranty, commission, financing, transport, advertising, etc. Where the terms of sale provide for any discount, the value for tax is the discounted amount. The value of taxable services includes any incidental costs incurred by the supplier, excluding any disbursements made to third parties. Disbursements include costs incurred on behalf of third parties and recovered on an actual basis without any mark-up. Where a mark-up is added, such disbursements are vatable, in which case an input VAT suffered on the disbursement can be also be claimed. The total consideration payable in respect of a taxable supply by a taxable person will include the tax charged. Therefore the value for VAT purposes would be such an amount, which in addition to the tax chargeable amounts to the total consideration paid or payable. Retailers are required to quote or label prices inclusive of VAT.

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In the case of hire purchase or lease agreements, the taxable value excludes any interest or finance charges. A taxable person whose registration has been cancelled is treated as having made a taxable supply of all the goods in hand at the date of cancellation including capital goods, and is liable to account for output tax on such goods on the market price of those goods at the time the supply is deemed to have been made. The taxable value of imported goods is the sum of: the value of the goods as ascertained for purposes of customs duty; and the amount of customs duty, excise duty, and any other taxes paid. The taxable value of any supply of goods has been restricted to the amount of customs duty paid, unlike previously where the gross value of the customs duty was included in the taxable value irrespective of whether paid or remission granted. . The taxable value of imported services is the price at which the supply is provided. The taxable value of hotel accommodation and restaurant services shall exclude any catering levy and service charge. The service charge should be distributed to employees and should not exceed 10%. The taxable value of mobile cellular phone services shall be the value determined for excise duty under the Customs and Excise Act.

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5. OUTPUT TAX This is the tax charged on the taxable supplies made by a taxable person. 5.1. TAX INVOICES Taxable persons making taxable supplies to other persons are required to provide them with a tax invoice at the time of the supply. Every registered person is required to issue a tax invoice to the purchaser at the time of the supply. Except as otherwise provided by the Commissioner, a registered person providing a tax invoice must record on that invoice the following particulars: the name, address, tax registration number of the person making the supply; the serial number of the invoice; the date of the supply, if different; the name and address and tax registration number of the person to whom the supply was made, if known to the supplier; the taxable value of the goods or services, if different from the price charged; the rate and amount of tax charged on each of those goods and services; details of whether the supply is a cash or credit sale and details of cash or other discount, if any, that apply; the total value of the supply and the total amount of VAT charged; a business logo; and an electronic signature (for persons using an Electronic Signature Device (ESD)). Where a person uses an Electronic Tax Register (ETR), the ETR receipt should be attached to the invoice. Any invoice not containing any of the above particulars is not a tax invoice. Taxable persons require a valid tax invoice before they can claim credit for input tax. The person making the taxable supply is required to retain a copy of the tax invoice issued. Registered persons who make cash sales from retail premises may issue simplified tax invoices, which must satisfy the following requirements: the name, address and tax registration number of the person making the supply; the serial number of the invoice; the date of the invoice; a brief description of the goods or service being supplied; the total amount charged to the customer, VAT included; and an explicit statement that the price includes VAT. Such simplified tax invoice sales must either have an electronic signature or be accompanied by an ETR.

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5.2. ADJUSTMENT TO OUTPUT TAX 5.2.1. Bad Debts Inevitably not all debtors will satisfy sums due from them for the supply of goods or services. In Kenya, the invoice basis of accounting for VAT (as opposed to the cash basis) is used. However, relief is available in respect of VAT on bad debts subject to the following conditions: three years have elapsed from the date of supply; or the debtor has become legally insolvent. However, the claim for this relief must be made within five years after the date on which the tax becomes due and payable. Under these conditions, an application can be made to the Commissioner for refund or remission of the tax involved. The application should be accompanied by: a court decree to prove the insolvency of the debtor, ; a copy of the tax invoice provided in respect of each taxable supply upon which the claim is based; records or other documents, showing that the tax has been accounted for and paid on each supply upon which the claim for a refund of tax is based; evidence that every reasonable effort has been made to have the debt settled; and a declaration by him that he and the buyers are independent of each other. 5.2.2. Returned Goods, Credit Notes and Debit Notes A customer may return goods for one reason or another and receive a credit or refund. Should the supplier credit or refund VAT and adjust his own record of tax chargeable, he must issue a credit note. If the goods are merely replaced free of charge, no further VAT will be charged. Adjustments will, however, be necessary if the goods supplied in substitution are of a higher or lower value than the original goods. A credit note must be issued within twelve months after the issue of the relevant tax invoice. Credit notes should be serially numbered and should show sufficient details to identify the original invoice. Debit notes (or invoices) may be issued where there is a further charge on a supply already made. It should show all details required on an invoice. 5.2.3. Discounts The definition of consideration for VAT purposes only deals with discounts allowed and accounted for at the time of the supply. This means that discounts offered after the date of supply will not be considered in determining the value of the supply. Goods and services are frequently supplied for a consideration that is to be reduced if payment is made within a specified time. If the previously agreed consideration has been altered by agreement with the recipient of the supply, due to an offer of a discount or any other reason, the supplier must make an adjustment as follows: Where the output tax charged exceeds the output tax accounted for, the excess is regarded as tax charged by that person in relation to the tax period in which the change occurred. The supplier will be required to issue an additional invoice or, alternatively, issue a debit note;

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If, on the other hand, the tax accounted for exceeds the tax properly chargeable for the supply, the supplier will be allowed credit for the difference in the tax period in which the change occurred. The supplier will be required to issue a credit note for the amount adjusted for. 5.2.4. Returnable Containers Where taxable goods are sold in returnable containers and the containers were purchased or imported with tax paid, then no tax will be chargeable in respect of the containers. Where tax has been charged in respect of returnable containers which are then returned to the supplier, the supplier will be entitled to take credit for the tax in the succeeding VAT return. 5.2.5. Samples There are specific rules on the VAT treatment on samples. No VAT is charged in the following circumstances: the goods are distributed free as samples by a registered person in furtherance of his business; the samples have a value of less than two hundred shillings for each sample; are freely available; and are not limited in distribution to fewer than thirty persons in any one calendar month. 5.3. COMMERCIAL RENT, SERVICED APARTMENTS AND SERVICE CHARGES 5.3.1. Commercial Rent With effect from 1st January 2008, renting of non-residential buildings is subject to VAT at the standard rate of 16%. Input VAT incurred on the renting of commercial buildings will be offset with the output VAT payable and the difference thereon is payable to the VAT Department. 5.3.2. Serviced Apartments The VAT Act defines a hotel as premises on which accommodation is supplied or available for supply, with or without food and includes serviced flats, serviced apartments, beach cottages, holiday cottages, game lodges, safari camps, bandas, holiday villas and other premises or establishments used for similar purposes. Therefore, based on the said provision, service apartments are subject to VAT at the rate of 16%. However, the following will not be construed as hotels under the above provision: i) premises under a lease or license of not less than one month, unless by prior arrangement the occupier may, without penalty, terminate that lease or license on less than one months notice; ii) premises operated by an educational or training institution approved by the Minister for the use of the staff and students of that institution; or iii) premises operated by a medical institution approved by the Minister for the time being responsible for health for the use of the staff and students of that institution.

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5.3.3. Service Charges Service charge is levied for such services like security, cleaning, electricity, garbage collection etc. This is an incidental expense to supplying the accommodation service in a serviced apartment and forms part of the taxable value as defined under section 9 of the VAT Act. However, where it is a mere reimbursement of payments made by the property manager/owner on behalf of the residents, this will not attract VAT.

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6. INPUT TAX This is defined as the tax paid or payable in respect of a taxable supply to a taxable person, or the tax paid or payable on the importation of goods or services by a taxable person. VAT has been defined as a tax on expenditure or consumption in the domestic economy. The person who ultimately bears the tax burden is the consumer of taxable goods and services. For this reason VAT systems are designed to relieve the suppliers of goods and services of most or all the VAT burden in respect of the VAT charged to them by other suppliers in the course of their business. Registered suppliers are allowed to deduct the input VAT charged to them on supplies from the output VAT on supplies made in the course of furtherance of their business. The difference between the output VAT and input VAT is paid to the Kenya Revenue Authority. Not all tax suffered may be relieved in this manner. All the tax suffered by a taxable person, in respect of the goods and services supplied to, or imported by the person, for the purpose of his business, may be deducted from the output tax if a valid tax invoice is available except where the tax relates to the items specified in the Value Added Tax Order, 2002. Where a registered person acquires as stock in trade any goods of which VAT has not been charged, he is to assume that the purchase price is inclusive of VAT and claim input tax on such goods. Previously input tax was not allowed on such goods and no output tax was to be charged on the sale of such goods. 6.1. THE GENERAL RULE VAT paid can be claimed as input tax: only by taxable persons; if it is attributable to taxable supplies; if the person claiming input VAT has a valid tax invoice; if the person claiming input VAT has an original tax invoice from the supplier; and the tax relates to supplies in respect of which the law does not expressly prohibit the claiming of a credit. 6.2. TIME LIMIT Input tax cannot be deducted more than twelve months after the tax became due and payable. However, where a motor vehicle or other asset is acquired under a hire purchase or lease financing agreement, input tax cannot be deducted before a financier issues a letter of undertaking or clearance certificate. The input tax charged in these circumstances must be claimed within twelve months of the date of issue of the letter of undertaking or clearance certificate. 6.3. PARTIAL EXEMPTION Where only part of the taxable persons supplies are taxable, i.e. partly taxable and partly exempt, the amount of tax claimed as input tax is restricted to the tax in respect of the taxable supplies. Different methods are used in determining the amount to be claimed.

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The direct attribution method requires that each particular invoice received bearing VAT is linked to either a taxable supply or an exempt supply. Input tax attributed to taxable supplies is claimed in full, subject to any legal restrictions, whereas VAT attributed to exempt supplies is not claimable. In practice, this may be a time consuming exercise and the method is rarely applied. It is often not practical to employ the above method because not all inputs are capable of being split on this basis. This calls for some method of approximating the deductible input tax. Various methods may be employed. Whichever method is used, the Commissioner must be notified in writing. The following methods may be used without seeking the prior approval of the Commissioner: (a) Value of taxable supplies x Input tax = deductible input tax; or Value of total supplies

(b) i) full deduction of all the input tax attributable to taxable goods purchased and sold in the same state; ii) no deduction of any input tax which is directly attributed to exempt outputs; and iii) deduction of the input tax attributable to the remainder of the taxable supplies, calculated as under sub-paragraph (a). Where the value of taxable supplies is more than 95% of the total supplies, all the deductible input tax can be claimed. The restriction using the above formula is not applicable. A person who has restricted the claim for input tax using the above methods is required at the end of each accounting year to perform the above calculation based on: total value of input tax for the year; total value of taxable supplies for the year; and total value of supplies including exempt supplies for the year. The result of the above calculation is the total input tax claimable for the financial year. Where a person has, during the year, claimed an amount in excess of this, the excess must be paid to the Kenya Revenue Authority by adding it to the tax payable for the following month after the end of financial year. If the amount claimed in the monthly returns is less than the annual credit as calculated above, the amount under-claimed can be claimed in the following months return. Where VAT has been claimed with respect to the construction of business premises, and the premises cease to be used wholly for carrying out taxable supplies within five years, the input tax claimed thereon becomes payable. In addition, where the premises are sold or disposed off, the VAT claimed on construction becomes payable. Important Points to Remember on Input VAT Persons who do not usually make exempt supplies may fall under the partial exemption rules because of one-off transactions. It is particularly important that the likely partial exemption position be projected when planning exempt transactions, to ensure that the true cost of carrying them out is brought in with the other commercial considerations.

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In some cases, because of changes in the legislation, the tax status of some goods may change with the result that a person who was initially making taxable supplies now makes mixed supplies. It is therefore important to recognise such events and take necessary steps to enhance input tax recovery. A person who is subject to the partial exemption rules must periodically review the method used to apportion input tax in order to ensure maximum recovery at all times. The method used should be properly documented and working papers should be prepared when completing VAT returns to demonstrate that the selected method has in fact been implemented. Tax paid prior to registration on goods or assets can be claimed by a taxable person on becoming registered subject to the following conditions: the supplies were for use in the business; the goods are on hand at the date of registration; the claim is lodged within thirty days of registration. However, note that with effect from 12th June 2009, the period has been extended to sixty days; and the supply or import of capital goods or the construction of a building or civil works did not occur more than one year before the date of registration or a longer period, not exceeding two years, subject to the approval of the Commissioner. 6.4. IMPORTED GOODS AND SERVICES VAT on imported goods is paid by the importer together with the customs duty at the point of entry into Kenya. This is an input tax that is claimable in the month in which it is paid to the Customs department. It is important to retain the import entry documentation as support for the claim of input tax. VAT on imported services is accounted for by the person importing the service, whether registered for VAT or not, using form VAT7, which acts as a declaration from. A service imported into Kenya means a service provided by a person normally resident outside Kenya who is not required to register for tax in Kenya, or a service provided by an export processing zone enterprise for consumption by a person in Kenya whether or not the service is provided from outside or in Kenya or both inside and outside Kenya. The tax paid is reclaimable as input tax in the same month in which it was declared as output tax by the registered persons.

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7. VAT REMISSION The VAT Act prescribes VAT remission on the following: a) Investment Incentive for Investment over Kenya Shillings One Million The VAT Act prescribes VAT remission wholly or partly on approval of the Minister of Finance on capital goods, excluding motor vehicles, of a total value of not less than one million shillings per investment, imported or purchased locally for new investments or the expansion of investments. Numerous investors for example in the hotel industry have been able to benefit from the said provision. b) Low Cost Housing The VAT Act prescribes VAT remission on taxable goods and services supplied by a registered person to a specific project approved by the Minister, on the recommendation of the Minister responsible for housing, for the construction of not less than twenty housing units for low income earners. The house being put up should be at a construction cost of not more than one million six hundred thousand shillings and of plinth area of not less than thirty square meters and it should be for low income earners, that is persons whose monthly gross earning amounts to thirty five thousand shillings or less. c) Construction or Expansion of Private Universities The VAT Act prescribes VAT remission on taxable goods and supplies by a registered person for use in the construction or expansion of private universities (excluding student hostels and staff housing). However, note that the Minister of Education must recommend the said project before the Minister of Finance approval is granted.

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8. RECORDS, RETURNS AND REFUNDS 8.1. RECORDS The VAT Act prescribes the records that every registered person has to keep, to safeguard revenue collection. 8.1.1. Accounting and Computer Systems A registered persons accounting system, whether manual or computerised, needs to be sufficiently elaborated to be able to provide the information required to complete the VAT return. 8.1.2. The VAT Account Every registered person is required to maintain a VAT account detailing input and output VAT on supplies. This section highlights some useful points to consider on maintaining the said account. a) Output Tax The system must be able to identify separately the aggregated standard-rated, zero rated and exempt supplies made by the person in each tax period. Deemed supplies such as sale of fixed assets, self supplies, etc. are likely to be left out of the system. The system must be able to identify deemed supplies, in particular in respect of: - sale of scrap, waste products, obsolete stocks, etc.; - sale of fixed assets, especially for which input tax credit was claimed; - goods acquired for business use but put to private use; and - donations and gifts of taxable goods. The system must be capable of: - making adjustments in respect of credit notes received and debit notes issued; - other adjustments affecting the output tax for the period; and - ensure internal invoices do not bear VAT. In the case of a computerised system, coding of supplies may be useful. b) Input Tax The system must be able to distinguish the deductible and non-deductible tax suffered in respect of the goods and services acquired. This is a very important requirement as it can have punitive penalties implications. Where there are significant exempt supplies made, a basis of apportioning the tax incurred in respect of supplies used to make both taxable and non-taxable supplies needs to be determined. The system should ensure that tax invoices are received promptly and that they are carefully checked to ensure they meet the requirements of a valid tax invoice before any credit for input tax is claimed. Adjustments for debit notes received and credit notes issued are to be recognised on a timely basis.

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In designing or evaluating the accounting system, it is important to consider the need to maintain an audit trail. It should be possible to work back from the VAT return to the source documents and vice versa. It should also be possible to tie the figures on the return to the management accounts. The following points may be useful: Separate the input tax from the output tax by keeping separate accounts for each. Have separate input and output tax accounts for each rate of tax applicable. If you make standard-rated as well as zero-rated supplies, then you will have two input tax accounts and two output tax accounts. In addition to the above accounts, it is also useful to keep a VAT clearing account. This account can be used to clear all the input and output tax accounts each month to reflect the net VAT payable or refundable. Always reconcile the balance on VAT control account with VAT3 balance and the ETR monthly summary or Z reports. The prescribed accounting period for VAT is one calendar month. Often, especially in some large organisations, the books of account are closed off, by say, the 25th day of the month. Transactions occurring after the cut-off date are recorded in the following month. If this happens, adjustments need to be made when completing the return to include the transactions of the current month which have been recorded in the following month. Similarly, those transactions from the last days of the previous month, which have been recorded in the current month, should be adjusted for. c) Exports The following records should be retained: a stamped copy of the Customs Export Entry form; a purchase order form or contract with the foreign customer; a copy of the invoice issued to the foreign customer; and evidence that the goods left Kenya in the form of copies of transit documents such as airway bill, road manifest, bill of landing etc. If an export of goods is construed as a domestic supply, the tax payer is required to account for VAT thereon. 8.1.3. Cash Records All records of cash transactions including cash books, petty cash vouchers, all account books, records of daily takings such as till rolls, copy receipts or daily takings records should be maintained.

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8.1.4. General Records A registered person must, in any event, maintain the following: copies of all invoices issued in serial number order; copies of all credit and debit notes issued, in chronological order; all original purchase invoices, original copies of customs entries, receipts for payments of customs duty or tax, and original credit notes and debit notes received, to be filed chronologically either by date of receipt or under each suppliers name; details of the amount of VAT charged on each supply made or received; totals of the output tax and the input tax in each period and a net total of the tax payable or excess tax carried forward, as the case be, at the end of each period; details of goods manufactured and delivered from the factory of the taxable person; copies of stock records kept in a chronological order; and journals, ledgers, cash/petty cash books, audited accounts, bank statements. The above records should be kept in Kenya in Kiswahili or English and must be retained for at least five years after the tax period to which they relate. The Commissioner, or an officer authorised in writing by the Commissioner, is empowered at all reasonable times to inspect the records.

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9. COLLECTION, REMISSION, RECOVERY AND REFUND OF TAX 9.1. THE VAT RETURN As mentioned above, the prescribed accounting period for VAT is one calendar month. A taxable person is required to lodge a return for each tax period to the Commissioner by the twentieth day of the month following the tax period. Any tax due is paid on the same date. Where the twentieth day falls on a weekend or public holiday, the return must be submitted on the last working day prior to the weekend or public holiday. A taxable person must submit a return whether there is tax payable or not. Where there is no tax payable a NIL return is required. The VAT 3A form should accompany the VAT Return where the input tax incurred is Kshs. 3 million or more for a Nairobi trader or Kshs. 1.5 million in other districts. A VAT 3B form analysing all zero-rated supplies should also be submitted where zero-rated sales are made. The Commissioner is empowered to allow a taxpayer to file returns and receive other information electronically. Currently, the move is towards filing the returns electronically. All tax payments are made to the following accounts. Bank Central Bank of Kenya National Bank of Kenya Account Name VAT Main Collection Account VAT Collection Account Account Number 040100115 0100105109600

In practice, these are made through the taxpayers commercial bank for credit to the above accounts. Payments over Kshs. 1 million have to be made using RTGS. The following mandatory information is required - name of taxpayer, taxpayer registration number, e-slip number and amount of VAT remitted. 9.2. SET OFF The Kenya Revenue Authority Act enables taxable persons to set off refunds in one type of tax or duty against liabilities in other taxes or duties. The set off is applicable to VAT on local supplies of goods and services on application in writing to the Kenya Revenue Authority by the taxpayer. However, before the set off is granted, Kenya Revenue Authority will confirm whether the amount of refund is due and payable.

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9.3. REFUND OF TAX 9.3.1. Credit for Input Tax Against Output Tax If, for any tax period, a person has overpaid tax, i.e. the input tax claimed exceeds the output tax for the period, the excess amount is carried forward to be set-off against output tax for the following period. However, if this position is a regular feature of the business then the Commissioner shall refund the excess amount where: i) The amount of input tax exceeds the amount of output tax as a result of the trader making zero-rated supplies; or ii) VAT charged has been withheld by the buyer of the taxable supplies; or iii) Taxable goods have been manufactured in or imported into Kenya and tax has been paid in respect of those goods and, before being used, those goods are subsequently exported under customs control; or iv) Tax has been paid in error. 9.3.2. Bad Debts Where a person has supplied goods or services and has accounted for and paid tax on that supply but has not received payment from the buyer, he may apply for a refund or remission of the tax upon lapse of three years from the date of supply or if the buyer has become legally insolvent. An application for refund in respect of bad debts must be made within five years from the date of supply. 9.3.3. General Observations on VAT Refunds No tax is refundable if the registered person is not up-to-date in the submission of VAT returns. All refund claims for amounts exceeding Kshs. 1 million should be certified by external auditors before they are submitted to the department. An auditor certifying a refund claim is required to furnish to the Commissioner, not later than the 20th of the next month, with a return of all claims filed by him in the last tax period. The claim for refund must be made on the appropriate form within a period of twelve months, although this can be extended to twenty four months at the discretion of the Commissioner. 9.4. RECOVERY OF TAX The Commissioner has been granted wide powers under the VAT Act to collect tax that is due and payable. 9.4.1. Withholding VAT Agent The Commissioner may appoint any person who purchases taxable goods or services, a tax withholding agent. Such an agent is required to withhold the VAT applicable and remit it directly to the Commissioner irrespective of whether the purchaser is registered for VAT or not. The withholding VAT agent is required to furnish the supplier with the withholding VAT certificate at the time of making the payment for the supplies.

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The Commissioner is empowered to either revoke such an appointment at anytime or to exempt some taxable supplies from withholding VAT, upon application by a supplier of taxable goods and services. Note that no tax shall be withheld from suppliers subject to turnover tax under the Income Tax Act upon presentation of a valid turnover tax registration certificate. 9.4.2. Collection Agents The Commissioner may collect tax by distress, rather than sue for the recovery of unpaid tax. To do so, the Commissioner is empowered to order and empower an authorised officer to exercise distress upon the goods and chattels of the person from whom tax is recoverable. A distress levied shall be kept for ten days during which the taxpayer can pay the tax and distress costs to recover the goods and chattels distrained upon or else they shall be sold by public auction. The proceeds from the auction shall first be applied towards the costs of levying the distress, keeping and selling the distrained goods and finally, towards tax. Any amounts remaining shall be paid to the distrainee. Where a liable person fails to pay tax, the Commissioner is empowered, by a notice in writing, to require any person listed below to pay the money to him: Any person owing or who may owe money to that person. Any person who may subsequently hold money for, or on account of, the person. Any person who holds or may subsequently hold money on account of some other person having authority from some other person to pay money to the delinquent taxpayer. 9.4.3. Charge of Property and Subsequent Sell Where a person liable for tax fails to remit the tax within the prescribed time, the Commissioner may, by notice in writing, inform the person of his intention to apply to the Registrar of Lands to attach any land and buildings owned by the person. If within thirty days of such notice, the tax remains unpaid, the Commissioner may by notice in writing, direct the Registrar of Lands to hold the land and buildings as security. The Commissioner is now empowered to sell land and buildings to recover tax. 9.4.4. Freezing of Accounts The Commissioner is empowered to recover outstanding tax as a civil debt due to the Government, where he has reasonable belief that: i) taxable supplies were made and no tax was charged; or ii) tax was charged but not remitted to the Authority; or iii) if there is likelihood of the person to frustrate collection of the tax, the Commissioner may apply to the High Court to obtain an order prohibiting transfer, withdrawal or disposal of the funds. Within 30 days of the order, or any extension given by the Court upon application by the Commissioner, the Commissioner is required to issue an assessment, which shall automatically remove the order.

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10. OFFENCES AND PENALTIES Penalties imposed under the VAT Act are as per the table below: OFFENCE Late payment of tax PENALTY Additional tax at 2% per month compounded. The interest chargeable shall not exceed 100% of the tax due. The Commissioner has power to grant remission for interest due up to a maximum amount of Kshs. 1,500,000. Where it exceeds this amount, remission will be given subject to the Ministers written approval. Where an application for remission has been made, the Commissioner will suspend charging of interest on payment of the principal tax pending hearing of the application. Where remission has not been granted or is partly granted on the interest, the balance of interest shall be due and payable within 90 days of determination of the remission application. A surcharge at the rate of 2% per month or part thereof shall be due and payable on interest unpaid after the specified period. Failure to comply with the Fine not exceeding Kshs. 15,000 and/or up to six months Commissioners notice to pay money imprisonment and liability to pay the amount discharged. owed to a taxable person from whom tax is due, or furnish a return showing monies held or due to a person from whom tax is due. Failure to produce books, records or Fine not exceeding Kshs. 15,000 and/or up to six months provide information as required by an imprisonment. authorised officer. Failure to produce books, records, Fine not exceeding Kshs. 15,000 and/or up to two years statements or other documents or to imprisonment. attend summons or to answer questions put by the Local Tribunal. Making false statements, providing false information, involvement in fraudulent evasion of tax, a non-registered person who holds himself out as a registered person. Fine up to Kshs. 400,000 or double the tax evaded, whichever is the greater. In addition, any taxable goods connected with the commission of the offence may be forfeited.

Failure to display registration certificate in Default penalty of up to Kshs. 20,000 and a fine of up to a visible place in the business premises. Kshs. 200,000 and/or imprisonment for up to two years.

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Late submission of application registration. Failure to apply for registration. for Penalty of Kshs. 20,000. Penalty of Kshs. 100,000. Penalty of between Kshs. 10,000 and Kshs. 200,000. Any goods connected with the offence are liable to forfeiture. Penalty of between Kshs. 10,000 and Kshs. 200,000. Penalty of Kshs. 10,000 or 5% of the tax due, whichever is the higher.

Failure to issue a tax invoice as required.

Failure to keep proper books or records. Failure to submit a return.

Withholding agents That do not comply The higher of Kshs. 10,000 or 10% of the tax withheld. with VAT ACT or persons who act as withholding agents while not recognised. General penalty for offences under the A maximum fine of Kshs. 200,000 and/or up to three years Act for which no specific penalty is imprisonment. prescribed. False VAT refund claims. Double the tax imprisonment claimed plus up to three years

Where an employee or agent commits an offence, the employer shall also be guilty of the offence unless he proves his innocence. Where a company commits an offence, every director and officer of the company concerned with the management of the company shall also be guilty of the offence unless he proves his innocence. The Commissioner is empowered, subject to specified conditions, to compound offences under the Act. The order issued by the Commissioner in such a case can be enforced as if it were a decree or order of the High Court. The taxpayer whose offences have been compounded is not liable to prosecution except with the express consent of the Attorney General.

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11. VAT AUDIT The Kenya Government has in the recent few years shifted emphasis of taxation from direct to indirect taxation. VAT has therefore grown to be one of the major revenue earners for the government. During the same period, the Kenya Revenue Authority has also embarked on extensive audit procedures for taxpayers as part of their tax modernisation programmes whose emphasis has again been shifted to VAT. Unlike Income Tax audits where they usually audit two consecutive years and then may give you a breather for three to four years, VAT audits are done on a continuous basis. The subsequent audit will therefore pick up from where the previous audit ended. The audit will usually focus on: Compliance with VAT laws and regulations Assessment of VAT not correctly charged Disallowance of input tax incorrectly claimed Identification of other offences and errors Levying of penalties and interest for the defaults and errors Educating taxpayers thereby ensuring better compliance in future Verify timely VAT Returns submissions Additional Circumstances Triggering VAT Audits Whilst most taxpayers will be subjected to annual or bi-annual VAT audits, the following circumstances can trigger an audit as well: Audit of related companies Sales in accounts different from VAT 3 figures Imported goods figures not tallying with customs records Persistent refunds for non-export entities Information from competitors, employees, etc. Persistent late submission of returns Transactions requiring PIN

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12. ASSESSMENTS, OBJECTIONS AND APPEALS 12.1. ASSESSMENTS The Commissioner may issue an assessment for tax in the following cases: Failure to keep proper books and records. Failure to lodge a return. The Commissioner is not satisfied with the return lodged. Failure to apply for registration. There is no time limit set for the Commissioner to issue an assessment. However, a registered person is only required to retain books and records for five years. 12.2. OBJECTIONS A person who disputes an assessment can object in writing to the Commissioner. The notice of objection should state the grounds of objection and should be lodged within 30 days after the service of the notice of assessment. Upon receipt of a notice of objection, the Commissioner may either: amend the assessment in accordance with the objection; amend the assessment in light of the objection; or refuse to amend the assessment. 12.3. APPEALS An aggrieved person may within thirty days of being notified of the Commissioners decision, appeal to the VAT Tribunal, provided: all returns of tax have been made; the amount of tax shown on the returns as due and payable has been paid; where an assessment has been issued, the person has to pay assessed tax not in dispute or such part as the Commissioner may require for the appeal to be registered. A person aggrieved by the decision of the Tribunal may appeal to the High Court within 14 days of being notified of the decision. However, the taxpayer must pay the tax in dispute in full, for the appeal to be registered. The burden of proving that an assessment is excessive is on the person objecting.

CAVEAT
This guide has been prepared by RSM Ashvir Consulting Ltd and incorporates the amendments proposed in the Finance Bill 2009. Whilst every care has been exercised in ensuring the accuracy and the completeness of the information, RSM Ashvir Consulting Ltd, RSM Ashvir and its staff involved in the preparation and review of this guide will not accept any liability for any errors or omissions contained herein whether caused by negligence or otherwise; or for any loss, howsoever caused or sustained by anyone who acts or refrains from acting as a result of placing reliance on the contents of this guide. This guide is for the exclusive use of the clients, business associates and staff of RSM Ashvir Consulting Ltd and RSM Ashvir and no part may be reproduced or published without our prior written consent. The information contained herein is for guidance only and should not be used as a basis of decision-making without appropriate legal and professional advice.

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