Introduction
VAT Auto Assessment (VAA) is an i-Tax generated assessment in Kenya.
This assessment results from sales and purchases variances that are picked from the automated cross-referencing of the submitted sales and purchases data in monthly VAT returns from two transaction persons. The assessments result from variances in output VAT and input VAT.
Output VAT
Output VAT is from sales by a VAT registered taxpayer. The sales data from one taxpayer is reported as purchase data by another taxpayer. According to the VAT Act, sales are reported for every VAT period which is one calendar month. The reporting must be done by the 20th day of the following month unless the taxpayer has informed the Tax Commissioner through an application that the submission of the VAT returns will be late. The taxpayer must inform the Tax Commissioner 15 days before the due date.
Input VAT
Input VAT is from purchases by a VAT registered taxpayer. Every VAT registered taxpayer is expected to report purchases and hence input VAT in the monthly VAT returns. The taxpayer is expected to report the purchases within the stipulated six months (in the VAT Act) from the date of the purchase.
In case the taxpayer fails to report the input VAT from the purchases within the six months, that input VAT cannot be reported in any other VAT return. The input VAT cannot also be utilized anywhere else within the VAT system. However, the person can utilize the VAT amount according to the Income Tax Act Cap 470, Section 15, which addresses expenditures incurred towards generation of taxable income.
Source of Variance
The variances in the sales and purchases data results from:
- Intentional errors by the buyer or seller or
- unintentional errors by the buyer or seller.
The errors that cause the variances result from:
- The buyer or seller undertaking certain actions.
- The buyer or seller failing to take certain actions.
Buyer
When this problem is created by the buyer, in most cases it means that:
- The buyer did not report the purchases.
- The buyer reported fewer purchases.
- Correct amount of purchases were reported but:
- There were no corresponding sales reported by the seller.
- The corresponding sales by the seller was less than that reported by the buyer.
Seller
When this problem is created by the seller, in most cases it means that:
- The seller did not report the sales.
- The seller reported fewer sales than were sold.
Demand Notice
Once the variances are detected in the i-Tax system, a demand notice will be sent. to the taxpayer. A demand notice is usually on KRA’s letterhead. The taxpayer is usually given a certain period within which to respond.
The Tax Procedures Act (2015) stipulates 30 days period for payments. The demand notice can either be:
- Emailed.
- Sent by post.
- Taxpayer can pick the letter.
Steps to Take
Once a demand notice is received from KRA informing the taxpayer of the VAA assessment, there are various steps that a taxpayer should take. The following are some of those steps:
a. Dates
- Note the date on the demand notice.
- Note the date the demand notice is received if different from that on the demand notice.
- Note the time given to make payment.
- Note the time given to lodge any notice of objection.
b. Contact KRA
After receipt of the demand notice, it is important to establish communication with KRA. This can be done by:
- Acknowledging receipt of the demand letter via email
- Making phone contact with the person whose phone number is indicated in the demand letter.
- Paying a visit to KRA offices.
c. Establish Source of Variance
This exercise should be undertaken by the person who is in charge of the accounts/tax section. In the tax demand notice, the tax period and the amounts are indicated.
Hence, the exercise is a fairly simple endeavour. The taxpayer will be able to establish the source of variances and separate the payable amounts and disputed amounts.
d. Lodge a Notice of Objection
In case the taxpayer has any disputed amount, the taxpayer should lodge a notice of objection. The notice of objection should be according to Section 51 of the Tax Procedures Act (2015).
e. Make Payments
After establishing the amount of payable tax in the assessment, the taxpayer should make the payment within the stipulated time. The payment depends on two issues:
- Taxpayer agrees with the full tax debt amount in the assessment
The taxpayer will make the tax payment depending on whether they have the money to pay the assessment or not.
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- Taxpayer has the money to pay the tax assessment in full – generate the payment slips in i-Tax and make the payment – there is already a debt in the system.
- Taxpayer has no money to pay the tax assessment in full – though KRA discourages this, under the Tax Procedures Act (2015) every taxpayer has a right to request for payment on an instalment basis. The taxpayer should prepare a payment plan and apply to make the payment on an instalment basis. KRA normally gives a maximum of five instalments. The payment plan must be signed by one of the directors. The taxpayer will not be able to generate a payment slip in i-Tax but should request KRA for one.
- Taxpayer is not in agreement with the full tax debt amount in the assessment.
The taxpayer should pay the amount of the assessment not in dispute. This will depend on whether the taxpayer has money to pay the tax assessment or not. However, for any payment, the taxpayer will have to request for a payment slip from KRA.
Penalties and Interest
A taxpayer can either pay the penalties and interest or seek a waiver. According to the Tax Procedures Act (2015), every taxpayer has a right to seek a waiver of penalties and interest. The taxpayer should lodge an application for the waiver in i-Tax.
However, in case it is not possible to lodge the application in the i-Tax, the taxpayer should take a hard copy to KRA and make sure receipt is acknowledged. The Tax Procedures Act (2015) does not dictate the delivery mode of the waiver application. The Commissioner may grant full application or part depending on the mitigating reasons.
Way Forward
The taxpayer should:
- Make sure that the tax payments are according to the agreed payment plan.
- Follow up on the notice of objection.
- Follow up on the waiver application.
Note:
Depending on the source of variance that resulted in the VAA assessment, there may be income tax implications.
For any clarifications, get in touch through the email Email: taxkenya@gmail.com
