VAT, withholding VAT and withholding tax explained
What each tax is, who deducts it, and how to keep track of it in your books, for Kenyan businesses.
Three taxes with similar names cause most of the confusion in small-business bookkeeping in Kenya: VAT, withholding VAT and withholding tax. Here's what each one is, who deals with it, and how to keep track of it.
This is a general guide, not tax advice. Rules and rates change. Check the details for your business with KRA or a qualified tax adviser.
VAT
Value Added Tax is charged on most goods and services. The standard rate is 16%.
If your business is registered for VAT:
- You charge VAT on your taxable sales (output VAT).
- You reclaim the VAT you paid on business purchases (input VAT), supported by valid tax invoices.
- Each month you file a return and pay the difference, by the 20th of the following month.
Keep every sales invoice and every supplier's tax invoice. Under current rules, expenses also need to be supported by eTIMS invoices from your suppliers to count for income tax, so ask your suppliers for them.
Withholding VAT
Some buyers, including government bodies and businesses KRA has appointed as withholding VAT agents, don't pay you the full VAT on your invoice. They withhold 2% of the taxable value and pay it to KRA on your behalf.
For example, on an invoice of KES 100,000 plus KES 16,000 VAT, a withholding VAT agent might pay you KES 114,000 and remit KES 2,000 to KRA.
That KES 2,000 isn't lost. You'll receive a withholding VAT certificate, and you claim it against the VAT you owe in your return. The mistake to avoid is writing it off as a bad debt, or chasing the customer for it.
To keep on top of it: record the withheld amount when you receive the payment, keep the certificate, and check every month that your certificates match what your customers withheld.
Withholding tax
Withholding tax is income tax, not VAT. When a business pays you for certain services, such as professional, management or contractual fees, it may deduct a percentage set by the Income Tax Act, pay it to KRA, and give you a withholding tax certificate.
The deducted amount counts towards your own income tax. Keep every certificate, and make sure your records show the full invoice as paid: part in cash, part in tax withheld.
Keeping the three apart in your books
| Who deducts it | What you receive | What you do with it | |
|---|---|---|---|
| VAT | You charge it | Full VAT from most customers | Pay the net amount by the 20th |
| Withholding VAT | Appointed agents | A withholding VAT certificate | Claim it in your VAT return |
| Withholding tax | Payers of certain services | A withholding tax certificate | Count it towards your income tax |
How SooBooks helps
SooBooks records VAT on every invoice and bill, and lets you record withholding VAT and withholding tax on each receipt, so the invoice shows as fully settled while the withheld amounts are kept for your returns. VAT reminders appear before the 20th. eTIMS integration is coming soon.