Contractual Agreements cannot waive a taxpayers responsibility/obligation under the tax law

Case Study: Jitihada Furniture Centre Limited VS KRA

KRA sent to JFCL a letter dated 8th September 2020 notifying it of an intention to do a compliance check.

A returns review was undertaken on JFCL, upon which it was established that there were sales variances between Value Added Tax (VAT) and Income Tax (IT). It was noted that JFCL was not charging VAT despite being registered for VAT and despite having a Vatable supply in the nature of commercial rent.

A pre assessment notice was sent to JFCL on 17th November 2020 via the company’s official email address

KRA engaged in numerous correspondences and met with JFCL’s tax agents to iron out the outstanding issues. On 30th November 2020, JFCL’s tax agent requested an additional time of 30 days since a new auditor had been appointed to look into JFCL’s books. The auditor sent a deposit list, a loan offer form, sales ledgers 2017-2020, loan repayment schedule, and bank statements on 18th December 2020.

On 23rd February 2021, KRA issued additional VAT assessments on the commercial income declared in the audited accounts.

JFCL objected on 22nd March 2021, after which KRA on 21st April 2021 confirmed the VAT assessments for lack of supporting documents and reasons for the objection.

JFCL appealed to the TAT

In its submissions dated 26th January 2022, JFCL contended that it started a new rental business after its business of selling furniture which was not performing well, was closed down

JFCL submitted that it entered into an agreement with tenants who had signed the tenancy lease agreements which stated that they will pay gross rent to JFCL and remit VAT to the Tax authorities by themselves thus no VAT was withheld.

JFCL further submitted that when the assessments were raised for the years 2016 and 2017, the lease was still in force and binding and the terms could not be altered until expiry.

It was submitted that Value Added Tax assessments were also raised for the years 2018, 2019 and 2020, respectively, which were also based on the Income Tax returns filed.

JFCL also argued that it did not commit any offence of withholding Value Added Tax and failing to remit to the Kenya Revenue Authority but that its offence was failing to withhold VAT on behalf of the client which makes it liable for the general penalty under Section 63 of the VAT Act No. 35 of 2013 which states that a person convicted under this Act for which no other penalty is provided shall be liable to a fine not exceeding one million shillings or to imprisonment for a term not exceeding three years or both.

Further, JFCL opined that there are no outstanding taxes because the documents and records were submitted to KRA for review to affirm the terms of the agreement. Secondly, the majority of the tenants had left, and following to confirm whether they remitted the taxes is quite a challenge.

KRA averred that upon undertaking a returns review on JFCL there were sales variances between VAT and Income Tax. That it noted that JFCL was not charging VAT despite being registered for VAT and despite having a vatable supply in the nature of commercial rent.

KRA contended that JFCL made an admission that it is only liable to a penalty for failing to charge VAT (or to “withhold”) and that the admission that there is an obligation that JFCL failed to perform renders the question for determination moot and as such, taxes are due from JFCL

KRA relied on Section 5(4) of the VAT Act, which states: ‘The amount of tax payable on a taxable supply. if any. shall be recoverable by the registered person from the receiver of the supply, in addition to the consideration. ” to support its point that it was the responsibility of JFCL to recover the tax from the tenants in addition to the consideration and that this is a responsibility imposed by the law and cannot be delegated to the tenant by a tenancy agreement. It was KRA’s position that the VAT Act placed liability on JFCL regardless of whether it had recovered the tax from the receiver of the supply or not

In its ruling on 25/03/2022, the TAT observed that

• It is evident that JFCL is badly mistaken in its understanding of its obligations under the VAT Act and has demonstrated this by entering into agreements that purportedly transfer its obligations to others, by misunderstanding the concept of withholding VAT from that of charging VAT and by assuming that penalties imposed under Section 63 of VAT Act are a cure to all these wrongdoings

• KRA did not err in charging VAT on JFCL’s income

As such, JFCL lost

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