TAXATION OF A SOLE PROPRIETORSHIP BUSINESS IN KENYA
As a sole proprietor you must report all business income or losses on your personal income tax return. The law does not require the owners of sole proprietorships to file separate tax returns. As an individual, owners of sole proprietorships will fill only the individual tax returns and list down the figures and information in their individual returns. The business will therefore be taxed at the rate of personal income instead of as a corporation.
A sole-proprietorship being owned by one person files taxes under Individual Income Tax and the PIN certificate used is usually that of the owner.
For Sole Proprietor Business, you will require to make income tax return yearly (before every 30th June). If you are charging your clients VAT on your products or services then you must acquire VAT obligation & ETR machine. Failure to do so can incur some penalties and also affect Tax Compliance Certificate application in the future.
If your annual turnover is above Sh5 million, you are required to register for VAT with the Kenya Revenue Authority.
Then, if everything you sell is VAT-rated, you need to apply VAT at the rate of 16 per cent, as the current law requires. Upon registration, you are required to comply with the VAT Act by ensuring that:
- VAT is charged on all taxable supplies made at the specified rates;
- A tax invoice is issued on supplies made;
- Monthly VAT returns are filed by due date; 20th of the following month; and,
- Where the output tax (VAT on sales) exceeds the input tax (VAT incurred on purchases) the difference should be paid to the KRA when filing the monthly VAT return. If, on the other hand, the input tax exceeds the output tax, the excess amount is carried forward to be offset against future output tax. However, if an entity is dealing with zero-rated supplies, it would always be in a VAT refund position. The excess credit would be refunded in line with existing VAT provisions. It is important to note that only registered traders are allowed to charge VAT on their sales. It is an offence to charge VAT if one is not registered.
Previously, the Kenya Revenue Authority used to issue VAT Certificates. But those days are long gone as KRA has been digitizing most of its operations.
In order for you to acquire KRA VAT for Sole Proprietor Business, you will need to apply for an online generated KRA PIN.
When you have acquired your KRA PIN online version, you will need to add VAT under Tax obligation. Please note that this process can’t be reversed or changed online. So make sure you know what you are doing.
If you fail or forget to file VAT returns, KRA will fine you Ksh. 10,000 for each month that you haven’t made your returns on time.
If your Sole Proprietor Business isn’t making any revenues then you are allowed to make nil returns. But make sure you don’t get used to making nil return even when your business is generating revenue because the taxman will catch-up with you and it won’t be business as usual.
However, if you already enabled the VAT under the Tax obligation but your business doesn’t need it at the moment, then you can write a letter to KRA offices and request them to disable your VAT obligation on your PIN in order to avoid being penalized Ksh. 10,000 every month for failure of not making monthly VAT returns.
A resident taxpayer whose annual gross turnover does not exceed KES 5 million will be taxed turnover tax at the rate of 3% per quarter of one’s turnover. In such a case, the taxpayer will not be required to register for VAT. Turnover tax does not apply to rental income, management or professional fees, training fees, income subject to WHT as a final tax, and income of incorporated companies. Loss making businesses are allowed to make an election to be exempted from turnover tax. A written application for exemption has to be made to the Commissioner.
We advise most Sole Proprietors to get an accountant for their business to make sure that book-keeping is in order.