Previously, we mentioned how businesses face the threat of various penalties from the Kenya Revenue Authority (KRA). These mostly arise from disorganized information leading to incorrect calculations and late filings. Furthermore, many businesses lack accurate knowledge of their full tax obligations.
This article will therefore overview common tax categories, then recommend a more efficient tax accounting method.
Taxes for small businesses
They include:
- Income Tax
Small businesses can be owned by an individual (sole proprietorship) or more than one individual (partnership).
For sole proprietorships, tax accrued on all annual income earned by the owner is paid to KRA and returns filed on/before 30th June of the following year.
For partnerships, income earned by the business is first distributed amongst partners according to the partnership agreement. This then forms part of their individual income to be taxed similarly to that of sole proprietors.
For detailed information on individual income tax, including applicable rates, visit the KRA website.
- Pay As You Earn (PAYE)
This applies to employees within the small business.
Business owners should deduct this tax from their employees’ salaries and wages at the applicable rate and remit the same to KRA on/before 9th of the following month.
This article provides more PAYE information, including how it is calculated.
- Value Added Tax (VAT)
This applies to businesses supplying/importing taxable goods/services worth Kshs 5,000,000 and above within 12 months.
Upon VAT registration, businesses are required to remit this tax to KRA on/before the 20th of the following month. Exempt supplies are listed on the Second Schedule of the VAT Act.
This KRA site offers detailed VAT information, including applicable rates.
- Turnover Tax
It is charged at 1% of a business’ gross monthly sales, and expenses are not deductible.
It however only applies to businesses with annual income above Kshs 1,000,000 but below 50,000,000. The due date is on/before 20th of the following month.
Visit KRA for more information.
POS for Tax Accounting
Not only do Point of Sale (POS) Systems facilitate wireless transactions, but they can also assist small businesses in efficient and effective tax accounting through:
- Automated sales reports
They record each wireless transaction in real time and can therefore compile total sales statistics within any given period.
Net income is then reported once allowable expenses are deducted from these sales revenue figures, and finally total income tax is calculated.
Additionally, these reports enable convenient and accurate calculation of Turnover Tax on gross monthly sales.
- VAT records
POS software indicate VAT due against each wireless sale, enabling businesses to easily collate these figures and file their monthly VAT returns.
- Employee records
Modern POS systems can be configured to collect employee information such as clock-ins and clock-outs. They also indicate the names of employees conducting each wireless transaction.
This greatly assists businesses operating on commission/hourly-wage basis to calculate the total PAYE due for each employee.
We therefore recommend maximal adoption of POS technology in small business transactions so that you can say goodbye to bulky counter-books.