Startups in Kenya refer to businesses that are very new or relatively new in the market. They may have been formed in the recent past or have not been in operation for long. For more context, these can be estimated to have not been around for more than five years. If you run such a business or are planning on starting one, what should you know about taxation for startups in Kenya?
Why You Need to Understand Taxation for Startups in Kenya.
Taxation, as a whole, is a complex matter that falls under the purview of the Kenya Revenue Authority (KRA). And for startups in Kenya, this complexity is more so if they are not furnished with the correct information concerning taxes. But how does knowledge about taxation for startups in Kenya help investors?
Remaining Compliant.
When investors are well-versed on taxation for startups in Kenya, this knowledge enables them to prepare their books of accounts accordingly. It also enables them to pay their taxes on time.
All income-generating businesses are liable to pay taxes from their profits, and the most common ones are Income tax in the form of corporate tax or PAYE, unless they are legally exempted. Most businesses also pay VAT (Value Added Tax), WHT (Withholding Tax), Excise duty, etc., where applicable.
When taxpayers in these businesses are aware of their obligations, they are also able to avoid penalties consequential to non-compliance with the tax laws. The penalties can be very expensive sometimes and can even kill some businesses. For example, VAT is paid monthly. If you have a VAT obligation and you fail to pay it on the due date, you are penalised every month that you fail to.
Enjoying Tax Reliefs.
Some taxpayers are also entitled to tax reliefs and/ or exemptions from paying certain taxes. There are also cases where taxpayers can claim tax refunds. The refunds are applicable in some cases where one has overpaid a tax, or in VAT matters, taxpayers can be refunded VAT payments in certain circumstances. It’s only the knowledgeable taxpayers with the information on the reliefs, tax exemptions and refunds who can claim the same.
Again, when it comes to benefitting from the aforesaid reliefs, exemptions and refunds, there are procedures to be followed without which a taxpayer will not benefit. There are also timelines set out by the law within which one can make an application for the benefits aforesaid. If you fail to observe the timelines or make the right applications, you lose the benefits in question. Thus, it’s very important to have the necessary information all the time.
Timely and Correct Tax Payments.
Knowing which taxes apply to you is not enough. Instead, it is also important for the taxpayers to know when to make their returns and pay the taxes due and owing to KRA.
Different organizations do this at different times of the year. The law also changes quite often, and so do the requirements on tax filing procedures.
For example, the KRA has now introduced a new regulation which requires taxpayers to validate their returns with evidence of the expenses claimed in the returns.
This is a new requirement that many taxpayers might also not be aware of. If one fails to comply with this, there are likely to be negative consequences for the taxpayer’s business.
To add to the complexities of taxation for startups in Kenya, tax laws keep changing all the time. A taxpayer who is not well versed with frequent changes ends up holding the short end of the stick, so to speak.
This taxpayer might end up losing on benefits which he might not be aware of or being penalized for commissions and omissions coming through new changes that he is not aware of.
Penalty Avoidance and Capitalizing on Incentives.
Taxation is a matter that can make or break a startup, as failure to pay the due taxes can lead to very heavy penalties. It is also worth noting that there are tax incentives that may be available for startups in certain sectors and or certain locations, including tax holidays. It is therefore very important to know about these tax incentives and whether they apply to your startups.
Structuring a Business to Account for Taxation for Startups in Kenya.
Taking all the above taxation complexities into consideration, it is very important for startups to start their business with a good tax structure done by an expert in tax matters. This structure will give all the important information to the taxpayer on:
- Their tax obligations,
- How and when to do their returns,
- How and when to pay the taxes due, and
- The penalties that will accrue when the taxpayer fails to adhere to the legal tax payment processes, and how to avoid them.
This tax structure is not only for startups. It applies to other businesses as well because it teaches businesspeople how to manage their businesses without getting into conflicts with the taxation law. It also puts the business owners on top of their businesses as they have all the necessary information relating to their businesses.
The structuring will also become the reference point for all the businesses’ tax matters. Again, as tax matters are very fluid, the same can be changed as and when the law changes, thus keeping the taxpayer always well-equipped taxwise.
Failure to get the necessary tax knowledge leaves the taxpayer in a very precarious position. The winds of the tax obligations will hit you from all directions. You will not know how to shield yourself from the consequential damage. You will also not be able to deal with the KRA when it comes knocking on your door. Your business will have been left open to all negative possibilities. Take charge of your business now.
Get Advice on Taxation for Startups in Kenya.
With the ins and outs of taxation, having the right legal help from the start can help you avoid penalties as well as other negative consequences that can result from non-compliance. Book a consultation with one of our legal experts using the form below, and we will guide you on the right path for your business.
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