Forced VAT Registration, Documentation

Case Study: Metropolis Property Management Limited v Commissioner of Domestic Taxes

MPML is a company in the business of property management services. KRA , in the course of its statutory duty of administering and collecting government revenue noted variances between MPML’s income tax returns and aggregated 12 months as per the VAT returns and employment expenses as claimed in income tax returns and aggregated 12-month gross cash pay as per the PAYE return for the period 2015-2019. KRA undertook verification of MPML’s tax declarations and, on 16.04.2020, served MPML with a verification notice and requested it to explain the variance. KRA thereafter raised additional assessments in respect of VAT and Corporation Tax amounting to Kshs. 10,106,537.00 on 10.07.2020.

By its letter dated 05.08.2020, MPML objected to the assessments. It averred that the VAT assessment was erroneous because it was not registered for the VAT obligation during the respective periods and would therefore not be in a position to declare VAT sales. The assessment was further based on an erroneous assumption that the total sales for the subject period occurred in the month of February 2019, being the month the taxpayer registered for the VAT obligation. On the Corporation Tax assessment, MPML stated that the same was as a result of disallowing the salary and wages expenses for the reason that it was supposed to have been subjected to PAYE without verifying the nature and the amount involved. In KRA’s letter of 16.04.2020, KRA indicated that there was a need to verify the taxpayer’s PAYE operations but did not take any further steps before raising the assessment.

MPML averred that it did not have the PAYE obligation prior to the assessment because the wages were only allowances paid to caretakers and security personnel employed by the respective landlords for assisting in rent and documents collection and was far below the PAYE threshold. For these reasons, MPML urged KRA to review the assessments and amend them accordingly.

KRA made its objection decision on 30.08.2021 (“the Objection Decision”). It stated that while MPML had argued that the sales declared in the financial statements included rental income earned by its director, it failed to provide a detailed schedule of bank deposits differentiating the agency fees and rental income. It stated that it reached out to MPML for information, which it never availed and where availed, it was incomplete. For instance, the bank statement presented on 27.07.2021 only covered the period 06.07.2018 to 31.012.2018 and lacked the schedule to support the transactions.

KRA thus confirmed its earlier VAT assessment of Kshs. 5,954,368.08 and stated that VAT is chargeable on property management services upon attainment of a turnover of Kshs. 5 million. On the objection in respect of the Corporation Tax assessment, KRA noted that the analysis provided by MPML was incomplete and lacked proof that the salaries and wages were incurred in the furtherance of the property management. It failed to provide proof of payment to the employees, their KRA PINs, and a link to the bank statement showing how the cash payments were done. KRA further noted that MPML provided an incomplete cashbook that had a credit side only and the debit side was missing and that it was therefore impossible to confirm that, indeed, MPML paid the employees.

In view of the foregoing, KRA stated that it would allow the salaries and wages to expense to the extent of the gross salaries as filed via the PAYE returns. KRA partially amended the corporation tax assessment to Kshs. 2,532,348.00 from Kshs. 3,399,719.00 and demanded VAT and Corporation Tax amounting to Kshs. 8,486,716.00.

MPML appealed to the TAT

On VAT, the Tribunal also agreed with KRA that if a person eligible for VAT fails to register then KRA can register it and charge VAT in accordance with section 34(6) and (7) of the VAT Act, 2013. The Tribunal, therefore, found that KRA acted lawfully in registering MPML for VAT but held that the action of backdating the VAT liabilities was unlawful. Having been registered and notified of its VAT obligations on 09.02.2019 and MPML having failed to appeal that decision, the Tribunal held that MPML became liable to pay VAT as from the month of March hence MPML was liable to pay VAT prospectively from 01.03.2019. Consequently, the Tribunal partially allowed the appeal and upheld the Corporation Tax of Kshs. 3,399,719.00, limited MPML’s VAT liability from 01.03.2019 and vacated the liability of the retrospective period before 01.03.2019.

MPML appealed to the High Court

In its decision on 26/09/2023, the High Court observed that:
  •  The necessity of documentation is underpinned by various provisions of tax statutes; Section 59 (1) of the TPA provides that a tax payer shall produce records when required to do so; Section 43 of the VAT Act, 2013 provides for the maintenance of records; the ITA section 54A requires a person carrying on a business to keep records adequate for the purpose of computing tax.
  • MPML did not produce the documents KRA sought from it, and the ones provided were deemed by KRA and the Tribunal to be insufficient to prove KRA’s assessments as incorrect.
  • There was no proof of payments to employees, MPML did not avail their KRA pins and failed to link the purported cash payments to the bank statement provided. MPML also provided a cash book that had only a credit side and no debit side.
  • MPML was unable to demonstrate that the sales as declared in MPML’s financial statements included rental income earned by its director. Without an elaborate explanation from MPML, KRA could not tell the difference between the agency fees earned by MPML and rental income earned by its director in the bank statement, meaning MPML’s assertions remained unsupported.
  • KRA used its best judgment in the circumstances.
  • MPML failed to discharge its legal burden of proof so as to upstage the Objection Decision.

As such, MPML lost


Leave a Reply