The term micro and small enterprises (MSEs) or micro, small and medium enterprises (MSMEs), is used to refer to SMEs in Kenya. Under the Micro and Small Enterprise Act of 2012, micro-enterprises have a maximum annual turnover of KES 500,000 and employ less than 10 people. Small enterprises have between KES 500,00 and 5 million annual turnover and employ 10-49 people. Medium enterprises are not covered under the act but have been reported as comprising of enterprises with a turnover of between KES 5 million and 800 million and employing 50-99 employees.
Another study by a global financial institution suggests that there are between 365-445 million micro small and medium enterprises in emerging markets. Out of these, 25-30 million are formal SMEs, 55-70 million formal micro-enterprises while 285-345 million are informal enterprises.
The Kenya National Bureau of Statistics indicates that there are more than 17 million SMEs registered in Kenya. 98% of them contribute about 25% of the country’s GDP
In Kenya, Economy Recovery Strategy (ERS) estimates that 500,000 jobs would be created annually with 88% of these generated through Small Medium Enterprises (SMEs)
However, research has shown that for every 100 SMEs started in a year, 60% close down within the first year, and those that survive the first year, 40% are likely to close in the second year
The Deloitte Kenya Economic Outlook notes, Kenyan SMEs are hindered by inadequate capital, limited market access, poor infrastructure, insufficient support from the Government, inadequate knowledge and skills, lack of adequate managerial training and rapid changes in technology. Corruption and unfavourable regulatory, environment are other challenges.
Compared to other sub-Saharan African countries and despite Kenyan banks’ and other small financial institutions improved involvement, Kenyan SMEs continue to face challenges related to financing.
Taxes for SMEs
This is a tax payable by a resident person whose turnover does not exceed Kshs. 5 million during a year of income.
Who should pay presumptive tax?
Persons liable to pay a Presumptive Tax shall be –
- resident persons whose gross turnover from business does not exceed Kshs. 5 million during a year of income; and
- who are issued or are liable to be issued with a business permit or trade license by a County Government
The rate of presumptive tax shall be an amount equal to 15% of the amount payable for a business permit or trade license issued by a County Government. This shall be a final tax paid upon the renewal of a business permit with a Penalty of 5% of the tax due and a late payment of interest 1% per month as outlined in the Tax Procedures Act, 2015.
Pay As You Earn (PAYE)
This is a method of collecting tax at source from individuals in gainful employment. Companies and Partnerships with employees are required to deduct tax according to the prevailing tax rates from their employees’ salaries or wages on each payday for a month and remit the same to KRA on or before the 9th of the following month.
Withholding Tax (WHT)
This is a tax that is deductible from certain classes of income at the point of making a payment, to non-employees.
WHT is deducted at source from the following sources of income: Interest, Dividends, Royalties, Management or professional fees (including consultancy, agency or contractual fees), Commissions, Rent received by non-residents.
Companies and partnerships making the payment, are responsible for deducting and remitting the tax to the Commissioner of Domestic Taxes.
Value Added Tax (VAT)
Value Added Tax is charged on supply of taxable goods or services made or provided in Kenya and on the importation of taxable goods or services into Kenya.
While companies & partnerships can voluntarily register for VAT they MUST register if their annual revenue exceeds Kshs. 5,000,000.
This is a duty of excise imposed on;
- goods manufactured in Kenya
- goods imported into Kenya and specified in the 1st schedule to Excise Duty Act, 2015.
Companies and Partnerships dealing in excisable goods and services are required to pay excise duty.
The List and types of Excisable goods and services are listed in the 5th Schedule as read together with Section 117 (1) (d) of the Customs and Excise Act.
They include; Mineral water, Juices, soft drinks, Cosmetics and Preparations for use on hair, Other beer made from malt, Opaque beer, Mobile cellular phone services, Fees charged for money transfer among others
Penalties charged on Tax offences
Tax offences can attract punitive penalties and interest
Failure to deduct PAYE, account for it or to submit a certificate upon request, attracts a penalty of 25% of the amount of tax involved or Ksh.10,000, whichever will be greater.
Failure to deduct or pay Withholding Tax, attracts a 10% penalty of the amount of the tax involved, up to a maximum of Ksh. 1 million.
Failure to pay Excise Duty or VAT attracts a Penalty in whichever is greater of, 5% of the amount of the tax due or Ksh. 10,000
Failure to pay tax on due date attracts a Penalty of an Additional 20% of the tax involved.
Failure to file annual returns by the due date attracts a Penalty of an additional tax equal to 5% of the normal tax, or Ksh. 10,000.
KRA PIN-related offences will attract a Penalty of Ksh. 2,000 per offence.
Tax saving strategies for SMEs
As a small business owner, you likely have several questions: How much do I pay? Why do I have to pay this amount? How can I reduce taxable income?
Unfortunately, many small business owners overpay on their taxes by missing out on certain deductions or managing their businesses and retirement savings in a way that is not efficient for tax purposes.
It’s important to speak with an accounting professional to make sure you understand specific tax issues and changes that are relevant to your business.
Be keen on adjusted gross income.
our adjusted gross income can directly impact the deductions and credits your business is eligible for. While the particulars of how to calculate this figure vary depending on specific tax laws, being aware of it is vital in planning for tax season.
Check with your accountant or third-party tax partner for specific guidance.
Use accountable plans.
If you reimburse employees for travel, entertainment, tools, or other costs, consider doing so using a plan, which is called an accountable plan. With this plan, the business deducts the expenses but does not report the reimbursements as income to employees, potentially saving the company employment taxes and lowering taxable income overall.
Establish a tax-favored retirement plan.
If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Most entrepreneurs I meet seem to be constantly teetering on the brink of personal insolvency due to an isolated focus on their business.
The most successful business owners are able to be more competitive because they feel financially fit themselves and thus more confident about the moves they make. An easy first step is to establish a retirement plan that offers you financial security regardless of the long-term success of your business. These plans come in many shapes and sizes, and a trusted financial professional can help you decide which is best for you.
Keep track of Expenses
It is important to review your tax situation throughout the year so you have an idea of what deductions will be available
Maximizing your deductions requires awareness of how you spent your money throughout the year which is also helpful for understanding cash flow.
Properly organizing and tracking receipts makes it easier to not only log deductions accurately but in the event, your business is audited, providing those receipts and proof of your expenses validates that costs were reported properly.
You may not be aware of this, but you can deduct your auto expenses when used for business. I just had a client leave his employer so he could start his own business. For the first two months after he went out on his own, he tracked his mileage and guess how much of it was for his business? The number was a little more than 90 per cent. If this pace continues for the whole year, he will be able to deduct thousands of shillings because he uses his car for business.
Avoid penalties for late payments.
This may be a simple concept, but it’s still a key issue and one of the most important business tax-savings tips. Late payments can be avoided in a variety of ways. Getting your documentation together early in the year can prevent last-minute filing and unforeseen expenses
When formally launching a business, you must decide what form of business entity to establish and the type of entity you choose has its own taxation policies and deductions. It’s a good idea to revisit your business structure every few years to see if reclassifying it makes sense based on your goals and financial bottom line.
Using tax software will make preparing and filing your taxes online much easier. Most tax preparation and filing software automatically account for tax laws and rules. This can simplify filing for you; reducing the likelihood of errors and making it easier for you to take full advantage of the opportunities at your disposal. What’s more, for some business owners, it can be one of the simplest and most cost-efficient ways of filing tax returns.
Put your family members to work.
I find employing family members to be one of the most overlooked and yet resourceful ways to begin reducing the household tax burden.
By employing your wife as the director of operations for your firm, for example, you will be able to double the amount of income that can be deferred. Even if your spouse isn’t working with you full time, he or she may be more engaged in your business than you think and could have a place there. If you have children, it may make sense to put them on the payroll, as well, as legitimate employees.
Your family business can help you teach your children about the value of a shilling and the importance of hard work. Children typically will be in a lower tax bracket, but that doesn’t mean they aren’t spending plenty of the household money. Rather than taking your personal wages and paying for the children’s expenses, you can pay them their wages directly, so they can cover those expenses themselves at a lower tax rate and potentially no tax if their income doesn’t exceed their standard deduction.
Deduct your home office.
Most people who work from home are afraid of taking the home office deduction. If you work from home at least look at if you qualify for this tax deduction, you may be overlooking an extraordinary opportunity.
You may be surprised by how much money you can save. Just be sure you’re executing a contract in which the rent is paid at fair market value and that it is an ordinary and necessary business expense of the entity.
Consider using a Tax professional
Even if you think you can manage to prepare your taxes on your own using one of the do-it-yourself online programs, a CPA or other tax professional is usually more affordable than you think.
An experienced tax professional has seen everything and knows how to get you the most favorable tax deductions and benefits. This usually saves the taxpayer or business at least as much as the fee the tax professional charges, plus you get the added benefit of being sure that your returns were prepared and filed properly.
As you can see, there are plenty of options for the SMEs, and unique ones at that. Make sure you consult with your advisers. A small business owner’s tax return offers a lot of potentials to keep the tax man at bay.
Domanag Consulting Limited, a professional tax preparation firm is willing and able to assist small to medium enterprises and taxpayers in general by providing personalized services that will potentially lower your stress and increase your overall tax health.
For further inquiries and clarification on the same matter and other tax and finance related issues, please contact the undersigned.
Director, Domanag Consulting Limited