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Introduction

When it comes to taxation, many professionals unless they are tax lawyers, accountants, auditors or tax consultants and advisers are at a loss about what to do.

Often, this is simply not where their expertise lies. This post though not seeking to make the professionals experts in tax matters intends to demystify taxation of professional service providers in Kenya using a medical provider with one clinic as an example.

The only way to avoid paying extra tax payments is by complying with the tax laws. In this post, we demonstrate how the medical provider can improve their tax complying.

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Let us call the medical clinic Central Road Clinic (CRC). The medical clinic is owned by a medical consultant who also works full time elsewhere on a permanent basis in a private hospital.

The doctor owner does not want to trade in their name and that is why they have registered CRC as a business name. This is a sole proprietorship. We will assume that CRC is operating from rented premises and the clinic offers only normal medical services.

We will also assume that the doctor owner only earns income from the provision of medical services. They do not engage in other income-generating activities such as farming, renting etc.

Taxes Applicable

The following are some of the taxes that apply to CRC and the doctor owner on personal compensation, purchases and fees charged:

Value Added Tax

Provision of normal medical services are not subject to Value Added Tax (VAT). However, CRC will be charged VAT on any procurement that are subject to VAT such as professional and management services, rent, stationery, electricity, telephone, security etc.

The VAT paid can only be recovered only if it is directly incurred for fees where VAT will be charged. Otherwise, the VAT will be recovered as part of the expenses when determining the taxable income.

Income tax

CRC is subject to income tax in Kenya in the following taxes:

a) Pay As You Earn

The medical facility is expected to remit Pay As You Earn (PAYE) for its employees such as the receptionists, nurses, cleaners, drivers etc. To determine the PAYE, the basic salary and all the benefits should be totalled up.

Some of the benefits to employees include non-cash and cash benefits such as meals and transport (when given in cash), housing etc. Current PAYE bands should be applied in determining the amount of PAYE payable.

b) Withholding tax

Provision of medical services on a consultancy basis is subject to Withholding tax provisions in Kenya. Therefore any person apart from the owner of CRC who offers any medical services or any professional or management services, their payment should be subjected to Withholding tax provisions at the professional rate of 5% subject to kshs 24,000 per month.

Also in cases where CRC may receive civil works services such as cable trunking, construction, renovations, Withholding tax should be deducted at the rate of 3% subject to kshs 24,000 per month. The medical clinic should remit the Withheld tax to KRA by the 20th day of the following months.

c) Instalment tax

Under the Income Tax Act Cap 470 in Kenya, the law provides that any person whose annual tax liability is more than kshs 40,000 per year should pay income tax on instalment basis four times a year. Therefore, the owner of CRC should pay income tax on an instalment basis.

Being an individual, the financial year is from January to December. Hence, the instalment taxes are supposed to be paid by 20th April, 20th June, 20th September and 20th December. Any balance of tax should be paid by the last day of April which is 31st the following year.

Instalment tax is approximated tax for the year and the owner of the facility should use either the prior-year basis or current year basis to determine the instalments. However, the owner must inform the Commissioner of the method they are using.

Any tax shortfall on instalment where the owner underestimates the tax paid is subjected to penalties and interests (read article on instalment tax in Kenya elsewhere in this website). Hence, CRC owner should be careful in estimating the instalments.

d) Personal income tax

CRC is a sole proprietorship. Therefore, the owner doctor is personally responsible for their taxes. Since the person is also working for a private hospital as a permanent employee, their pay from the hospital is subjected to PAYE at the normal PAYE bands.

However, the doctor must account for their total income from employment and CRC to the tax authority.

Therefore, the doctor should determine all the taxable income from CRC earned during the twelve months from January to December. This is irrespective of whether there is any outstanding payment to be received.

In Kenya, taxation is on accrual basis. Accrual basis means that tax is due whether received or not as long as it is recognized as due. Every time income is earned, tax is payable.

CRC should also determine all the expenses incurred during the financial year. The only expenses that are allowable and deductible are those expenses that are directly linked to the income earned by CRC. Some of the expenses that are allowed:

1. Rent.
2. Security.
3. Stationery.
4. Employee’s pay (receptionists, nurses, cleaners, drivers etc.).
5. Work-related travel – local and international.
6. Fixed telephone expenses
7. Mobile phone expenses (only 70% allowed).
8. Tools and equipment.
9. Annual practising certificates.
10. Financing costs (loans for the medical clinic and facilities).
11. Professional indemnity insurance.
12. General insurance.
13. Repairs and maintenance.
14. Office furniture.
15. Electronic items such as computers, scanners etc.
16. Medical machines such as MRI.

This list is not exhaustive, there are very many other expenses incurred during the year. The doctor needs to ensure that they are issued with invoices and receipts for every purchase. The accountant will sort out which expenses are allowed and which expenses are not allowed.

Tax payable

Once the person has all the deductible expenses, they should deduct the expenses from the income earned. The next step is to determine the taxable income for the year by CRC. To this, the person should add the income earned from employment.

Also, the person should add any other income from elsewhere they may have earned such as consultancy fees. This will be the total taxable income the person earned during the year.

The income should be subjected to the current PAYE bands to establish the tax payable. From the tax payable figure, the person should deduct the PAYE already paid on their behalf by the employer and any other tax that the person may have paid in form of Withholding tax and instalment tax.

Any tax established should be paid by the last day of April as balance of tax. Hence, it is important to establish the tax for the year before 31st April. The doctor should also remember to pay the 1st instalment by the 20th of April.

Annual tax returns

Once the person has established and paid all the taxes, they should prepare and submit the annual tax returns by the last day of June. Failure to do so will attract penalties.

For any clarifications, get in touch with us through the email.

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Disclaimer

This post is for general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.

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