The Costly Mistake of Poorly Done Payroll; Unreconciled Payroll Figures Subjected to PAYE.

Case Study: Eveready Security Guards Limited v Commissioner of Domestic Taxes (Tax Appeal E068 of 2024) [2025] KETAT 55 (KLR) (31 January 2025) (Judgment)

KRA conducted a review of ESGL’s declared tax returns for the years 2019- 2021, which KRA stated indicated there were reconciliations relating to bank charges, benevolent deduction deducted twice, double claimed directors Sacco charges and amounts below PAYE threshold which revealed inconsistencies. Following the review, KRA issued ESGL with an assessment notice dated 2nd August 2023 for the sum of Kshs. 21,269,640.25

ESGL objected to the additional assessment raised by KRA vide a letter dated 23rd October 2023. KRA reviewed the objection application and informed ESGL vide its letter dated 31st October 2023 that its objection notice was invalid and requested for additional documents.

ESGL responded vide its letter dated 17th November 2023 stating that it was fully compliant with the provisions of Section 51 (3) of the Tax Procedures Act.

Consequently, KRA issued its Objection Decision vide its letter dated 14th December 2023 and

ESGL filed an appeal at the Tax Appeal Tribunal on the following some of the grounds;

• That KRA’s additional tax assessment for PAYE covering the period 2021 is illegitimate and erroneous as sufficient information and explanations were provided before the assessment was made;
• That KRA erred in law and fact by disregarding ESGL’s schedule of employees below the PAYE threshold on the basis of lack of unique identifiers to prove the authenticity of the records;
• That KRA made an erroneous finding in finding that ESGL’s payroll for the period 2021 failed to reconcile the variances arrived at yet most of the reconciling items were paid to employees that were below the taxable threshold; and,
• That KRA erred in fact by holding that ESGL’s supporting documents as provided were not sufficient to support the variances on PAYE declared for the period 2021 and the payroll payments for the period 2021.

ESGL argued that:

• KRA erred in disregarding ESGL’s schedule of employees below the PAYE threshold on the basis of lack of unique identifiers to prove the authenticity of records.
• KRA further made an erroneous finding in finding that ESGL’s payroll for the period 2021 failed to reconcile the variances arrived at yet most of the reconciling items were paid to employees that were below the taxable threshold.
• KRA in arriving at its decision that there was a variance of Kshs. 21,269,640.25 for PAYE payable by ESGL, KRA disregarded the fact that there were employees of ESGL who were below the PAYE threshold. In particular, KRA’s decision to overlook ESGL’s payroll schedule on the basis that it did not have unique identifiers is found to be manifestly erroneous.
• Pursuant to the Third Schedule of the Income Tax Act, PAYE is only applicable to persons earning a gross monthly salary of Kshs. 24,000.00 and above which translates to an annual income of Kshs. 288,000.00 and above. In effect any person earning a salary of below Kshs. 24,000.00 monthly are not subject to imposition of the PAYE tax.
• To explain the variance in PAYE tax payable, it supplied KRA with a schedule capturing all employees below the PAYE threshold of Kshs. 24,000.00. It submitted that there is no regulatory requirement dictating that Payrolls ought to have national identity card number details, nonetheless ESGL in its objection attached its payroll with ID numbers and KRA PINs of its employees.
• A review of the said schedule of employees reveals that indeed there were guards who were earning a gross salary below the PAYE threshold hence it behooved KRA to take into account these employees and reconcile the same with the variances captured. It was averred that on average these approximately 500 guards employed in the year 2021 were earning between Kshs. 15,000.00 and 17,000.00, which translated to more than Kshs. 90,000,000.00 paid out in the year 2021 in salaries.

KRA Responded That:

• There were reconciliations relating to bank charges, benevolent deductions deducted twice, double claimed directors Sacco charges and amounts below PAYE threshold. However, the amounts relating to NSSF and pension were well supported and formed part of the employment costs claimed in the income tax returns for the period.
• There were amounts of Kshs. 67,542,335.55 that related to employees who were below PAYE threshold but a review of the same reconciliation revealed inconsistencies for the amounts declared per month for the period August 2020 to July 2021.
• The reconciliation for employees below PAYE threshold was further reviewed and the same compared to payroll summary figures as below for the guards on monthly basis for the period. The analysis revealed that there were inconsistencies in the reconciliation provided and thus KRA could not depend on this reconciliation, specifically noted the months of January to April and June 2021.
• A review of the payroll provided for the above amounts showed that the employee details were inconsistent. Thus, some employees did not have personal numbers, identity card numbers for the entire payroll period.
• ESGL’s bank statements did not show the details of employee payments but there were lumpsum figures for the debits and KRA could not verify payments via bank for the monthly individual payments.
• The reconciling items for the year 2021 relating to dismissal were not supported and ESGL did not provide a breakdown and supporting documents, hence the same was charged at the rate of 30 % for PAYE.

In its decision on 31/01/2025, The TAT observed that:

• ESGL had indeed made generalized averments and statements as regards the staff said to be below PAYE threshold without backing the same with solid evidence. ESGL was not only required to provide the number of employees below the PAYE threshold but is equally obligated to ensure that the details provided are verifiable.
• The failure by ESGL to provide KRA with the employees’ payrolls with unique identifies, proper reconciliation of variances, and broken-down specific bank payments instead of consolidated ones, meant that KRA could not verify and validate the extent of alleged employees below the PAYE threshold
• Consequently, ESGL failed to sufficiently discharge its burden of proof by rendering sufficient and relevant evidence to prove that KRA’s PAYE assessment included employees who were below the PAYE threshold.

AS such ESGL lost.

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