The Importance of Proper Record-Keeping in Tax Compliance in Kenya

Tax compliance is a fundamental aspect of running a business in Kenya. Proper record-keeping and bookkeeping procedures are essential not only for fulfilling tax obligations but also for defending tax positions before the Kenya Revenue Authority (KRA) and the Tax Appeals Tribunal (TAT). A recent case law, including Kariuki v Commissioner for Domestic Taxes (Tax Appeal E178 of 2024), highlights the critical role of proper documentation in obtaining a favourable judgment when contesting tax assessments.

The Role of Proper Record-Keeping in Tax Compliance

Section 23 of The Tax Procedures Act (TPA) mandates taxpayers to maintain accurate records of their financial transactions. Proper bookkeeping ensures that all income, expenses, and deductions are well-documented and can be substantiated when required. Key benefits of maintaining proper records include:

1. Accurate Tax Returns – Ensuring that income tax and Value Added Tax (VAT) filings reflect actual business transactions, minimizing discrepancies that could trigger audits.

2. Timely and Efficient Tax Audits – Well-kept records facilitate quick verification by tax authorities, reducing the likelihood of disputes.

3. Avoidance of Penalties and Interest – Failure to maintain accurate records can result in additional assessments, penalties, and interest due to misreporting.

4. Improved Financial Decision-Making – Proper bookkeeping helps businesses track profitability and cash flow, ultimately aiding in strategic planning.

Record-Keeping and the Tax Appeals Tribunal: Lessons from Kariuki v Commissioner for Domestic Taxes

The recent case of Kariuki v Commissioner for Domestic Taxes (Tax Appeal E178 of 2024) underscores the significance of comprehensive documentation in tax dispute resolution. In this case, the Kenya Revenue Authority (KRA) conducted a compliance check and issued an additional tax assessment amounting to Kshs 14,394,577 for income tax and VAT. The taxpayer challenged this assessment, arguing that the additional taxes were arbitrary and not based on his actual business transactions.

Key Takeaways from the Case

1. Burden of Proof on the Taxpayer – Under Section 56(1) of the TPA, the taxpayer bears the burden of proving that an assessment is incorrect. The Tribunal ruled that without sufficient supporting documents, the taxpayer failed to discharge this burden.

2. Need for Reconciliations and Detailed Financial Records – The taxpayer’s objections were dismissed partly because of inconsistencies between declared VAT sales and audited financial statements. This highlights the necessity of maintaining reconciliations between different financial records.

3. Supporting Evidence is Crucial – Despite claiming legitimate business expenses, the appellant failed to provide supporting invoices and documentation, leading to their disallowance.

4. Tribunal’s Reliance on Documentary Evidence – As emphasized in the ruling, decisions made by the TAT must be backed by verifiable evidence. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015, requires taxpayers to annex all relevant documents to their statements of fact.

Best Practices for Record-Keeping to Ensure Tax Compliance and Strengthen Appeals

To avoid unfavourable tax assessments and ensure a strong position in appeals, businesses should adopt the following record-keeping practices:

1. Maintain Detailed Financial Records – Keep comprehensive records of all transactions, including invoices, receipts, bank statements, and audited financial statements.

2. Ensure Consistency Between Tax Returns and Financial Statements – Discrepancies between VAT declarations and audited reports can raise red flags and result in additional assessments.

3. Regularly Reconcile Accounts – Businesses should frequently reconcile their income tax, VAT, and expense records to ensure they align with financial statements.

4. Retain Documents for the Statutory Period – Section 23 of the TPA requires taxpayers to retain records for at least five years to facilitate audits and tax dispute resolution.

5. Use Digital Bookkeeping Systems – Automating record-keeping with accounting software can enhance accuracy and ensure easy retrieval of records when needed.

Conclusion

The ruling in Kariuki v Commissioner for Domestic Taxes serves as a cautionary tale for taxpayers on the importance of proper bookkeeping. Tax compliance is not merely about filing returns but also ensuring that sufficient records exist to support all declarations. In the event of a dispute, taxpayers who maintain proper records stand a better chance of successfully challenging tax assessments before the Tax

Appeals Tribunal. As such, businesses must prioritize accurate record-keeping as an integral part of their financial management and tax strategy.

How We Can Help

Our tax team is fully equipped to assist businesses comply with the relevant tax laws and the obligations introduced under the TPA Act. We possess deep knowledge of tax law and accounting procedures, ensuring that taxpayers can effectively and comprehensively fulfill all their obligations under the law.

For any inquiries, please contact Wanjiku Kiguatha at wkiguatha@cmadvocates.com.