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 it does not seek to make professionals experts in tax matters, aims to demystify the 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 is by complying with the tax laws. In this post, we show how medical providers can improve their tax compliance.
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 under their name, and that is why they have registered CRC as a business name. This is a sole proprietorship. We will assume that CRC operates from rented premises and offers only standard medical services.
We will also assume that the doctor owner earns income only from providing medical services. They do not engage in other income-generating activities, such as farming or renting.
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 is not subject to Value Added Tax (VAT). However, CRC will be charged VAT on any procurement that is subject to VAT, such as professional and management services, rent, stationery, electricity, telephone, security, etc.
The VAT paid can only be recovered if it was directly incurred for fees that are subject to VAT. 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 benefits should be totaled.
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 should have their payment 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, and 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 month.
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 an installment basis four times a year. Therefore, the owner of CRC should pay income tax on an installment basis.
For individuals, the financial year is from January to December. Hence, the installment 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 the 31st of the following year.
Installment tax is an approximate tax for the year, and the facility owner should use either the prior-year basis or the current-year basis to determine the installments. However, the owner must inform the Commissioner of the method they are using.
Any tax shortfall on an installment where the owner underestimates the tax paid is subject to penalties and interest (read the article on installment tax in Kenya elsewhere on this website). Hence, CRC owners should be careful in estimating the installments.
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 subject 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 an 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 allowable and deductible expenses are those directly linked to the income earned by CRC. Some of the expenses that are allowed:
- Rent.
- Security.
- Stationery.
- Employee’s pay (receptionists, nurses, cleaners, drivers etc.).
- Work-related travel – local and international.
- Fixed telephone expenses
- Mobile phone expenses (only 70% allowed).
- Tools and equipment.
- Annual practising certificates.
- Financing costs (loans for the medical clinic and facilities).
- Professional indemnity insurance.
- General insurance.
- Repairs and maintenance.
- Office furniture.
- Electronic items such as computers, scanners etc.
- 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 are not allowed.
Tax payable
Once the person has all deductible expenses, they should deduct them from the income earned. The next step is to determine taxable income for the year using the 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 subject 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 the form of withholding tax and installment tax.
Any tax established should be paid by the last day of April as the 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 installment by the 20th of April.
Annual tax returns
Once the person has paid all taxes, they should prepare and submit the annual tax return 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 a 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 the 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. The tax industry in Kenya is very dynamic.
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