Should staff welfare costs be subjected to PAYE?

Case Study:  Kobo 360 Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E106 of 2023) [2024] KETAT 719 (KLR) (17 May 2024) (Judgment)

KRA conducted a desk review of the books, records, and accounts of Kobo for the years of income 2019 and 2020.

On 3rd October 2022, KRA issued Kobo with additional tax assessments for Corporate Income Tax (“CIT”), Pay as You Earn (“PAYE”), Withholding tax (“WHT”) and Stamp Duty for the years of income 2019 and 2020 amounting to Kshs. 33,770,395 inclusive of penalties and interest.

In this analysis we will delve on the PAYE only.

With regards to PAYE, the bone of contention was the variances in salaries declared for PAYE  and salaries claimed for Corporate Tax purposes.

On 2nd November 2022, Kobo lodged a partial objection to the assessment.

KRA issued Kobo with an objection decision on 13th February 2023.

Kobo, aggrieved with KRA’s objection decision, lodged an Appeal at the Tribunal on 14th March 2023 on  the following grounds:

  • That KRA erred in law and in fact by imposing PAYE on staff welfare expenses which are not taxable benefits on the employees, and which are allowable expenses for purposes of computing the taxable income of a company.

Kobo argued that:

  •  KRA erred by imposing PAYE on staff welfare expenses which are not taxable benefits on employees.
  • the value of the variance identified by KRA between the audited financial statements and PAYE returns for the years 2019 and 2020 relates to staff welfare costs which were not taxable on the employees and are allowable expenses for Corporate tax purposes.
  • Kobo further submitted that these expenses were not paid directly to the employees as benefits or allowances but rather they were Corporate costs incurred by the company to motivate the employees to improve productivity as provided for under Section 5(2)(a) of the Income Tax Act which states that;-

‘’For the purposes of Section 3(2)(a)(ii), gains or profits, includes; wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered and any amount so received in respect of employment or services rendered in a year of income after other than the year of income in which it is received shall be deemed to be income in respect of that year of income.”

  • Kobo submitted that Rule 2 of the Income Tax (P.A.Y.E) Rules further states as follows:

“emoluments” means- gains or profits from employment or services rendered which are payable in money; and the value of housing provided by an employer ascertained under section 5 (3) of the Act; and the value of benefit or facility provided by the employer, where the total value exceeds three thousand shillings per month; an

  • Kobo relied on the case of Cape Brandy Syndicate v. I.R. Commissioners [1921] 1KB where Judge Rowlett stated that:

“in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.

KRA Responded That:

  • KRA submitted that it identified variances between salaries in the audited statements vis-a-vis salaries as per the PAYE returns for the years 2019 and 2020. That it brought the variances to charge assessing PAYE of Kshs. 674,038.00 and 1,710,511.00 for 2019 and 2020, respectively.

In its ruling 17/05/2024, the TAT observed that:

  • The Tribunal in its analysis of the material adduced by Kobo sighted the PAYE reconciliation and ledger extracts for the specific staff welfare expenses.
  • The Tribunal was persuaded that the documents provided demonstrated that the variance was occasioned by staff expenses which are not emoluments hence they were not subject to PAYE.
  • The Tribunal therefore found that Kobo discharged its burden of proof by showing that KRA erred in imposing PAYE on staff welfare expenses which are not taxable.

As such Kobo won on this ground.

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Should staff welfare costs be subjected to PAYE?



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