LEGAL ADVICE ON PENALTIES FOR AND REMEDIES ON FAILURE TO FILE MONTHLY RETURNS BY VAT REGISTERED COMPANIES/BUSINESS NAMES

INTRODUCTION

Occasionally, companies are registered and PIN Certificates obtained even in circumstances where the time for active commencement of operations of company cannot be determined. Often, this is done in an attempt to procure all the corporate documents ordinarily required by potential customers (such a government as prequisite for award of tenders), financial institutions (such as banks for purposes of opening bank accounts), and revenue authorizes (such as KRA especially for import companies).

Tax problems may arise, especially, where such VAT registered companies do not file monthly VAT returns even as such companies remain inactive for a length of time.

TERMS OF REFERENCE

On this background, we render a legal advice on penalties for and remedies on failure to file monthly returns by VAT registered companies/business names, with the following specific terms of reference:

a)       Eligibility for registration of VAT in the first instance;

b)       Obligations on Registration for VAT;

c)       When VAT is due for payment (tax point);

d)      Requirement for Proper Keeping of Records;

e)       Requirement for Filing/Submission of Returns

f)        Assessment of amount of tax due on non-submission;

g)       Power to adjust amount of tax assessed;

h)      Default penalty for non-submission of returns;

i)        Power of commissioner to remit penalty for non-submission of returns;

j)         Variation of date of registration; and

k)       De-registration from VAT obligations.

In rendering this advice, we have considered the provisions of the Value Added Tax Act, Cap 476 of the Laws of Kenya.

ELIGIBILITY FOR REGISTRATION OF VAT

Rule 1 of the 6^th Schedule of the VAT Act dictates that any person who, in the course of his business-

(a) Has Supplied Taxable Goods Or Taxable Services, or Expects To Supply Taxable Goods Or Taxable Services or both, the value of which  exceeds, in any of the following periods, the values respectively specified –

Twelve months                  - Sh. 3,000,000

Nine months                      - Sh  2,400,000

Six months                          - Sh 1,800,000

Three months                     - Sh 1,200,000; or

[The minimum annual turnover of Kshs. 3 Million has been reviewed upwards to Kshs. 5 Million as from 2007.]

(b) is about to commence supplying taxable goods or taxable service or both which, in the opinion of the Commissioner, shall exceed any of the values prescribed in subparagraph (a) for the relevant period; or

shall be taxable person and shall, within 30 days from the date on which he becomes a taxable person, apply in the prescribed manner to the commissioner to be registered.

Accordingly, registration for VAT can thus be obtained suo moto on application by a company or by the Commissioner himself if the company in question is deemed to be registrable for VAT.

OBLIGATIONS ON REGISTRATION

Upon registration as a VAT agent, a registered person becomes bound by the provisions of VAT Act, including but not limited to:

1. furnish the purchaser with a tax invoice containing the prescribed details; 
2. keeping full and true records written up-to-date of all transactions which may affect his tax liability; 
3. adopting the use of a General Packet Radio Service (GPRS) electronic tax register of such type and description as may be prescribed; 
4. submitting to the Commissioner a return in the prescribed form, not later than the twentieth day of each month; and 
5. Paying tax in respect of the supplies at the prescribed time.

Ordinarily, the amount of tax payable, if any, is recoverable by the registered person from the purchaser in addition to the sale price.

TAX POINT

Tax point is the time when tax becomes due and payable to the Commissioner, and as advised herein-before, a registered person is obliged to pay tax at the time when the taxable service is received or payment is made for all or part of the service, whichever is the earliest.

Pursuant to Section 13 of the VAT Act, tax is due and payable when:- 

• The supply takes place;
• An invoice is issued;
• Pat of full payment for the supply is made; or
• A certificate of completion is issued (in case of construction industry),

whichever comes earliest of the four.

A tax payer can however defer payment of tax upto 20^th day of the month following that of sale (see Rule 7 of the 7^th Schedule to the VAT).

REQUIREMENT FOR RECORDS KEEPING

The Act demands for keeping of full and true records of written up-to-date of all transactions which may affect his tax liability, and failure to keep records as prescribed culminates to liability to pay a default penalty of not less than ten thousand shillings but not exceeding two hundred thousand shillings.

REQUIREMENT FOR FILING/SUBMISSION OF RETURNS

Rule 7 of the 7^th Schedule to the VAT Act provides that every registered person shall, not later than the 20^th day of each month, submit to the Commissioner a return in the prescribed form (Form VAT 3).

ASSESSMENT OF AMOUNT OF TAX DUE ON NON-SUBMISSION

Rule 9 (1) of the 7^th Schedule provides that where, in the opinion of the Commissioner, any person has failed to pay any of the tax which has become payable by him under this Act by reason of –

(a) his failure to keep proper books of account, records or documents, required under this Act, or the incorrectness or inadequacy of those books of account, record, or documents; or

(b) his failure to make any return required under this Act, or delay in making any such return or the incorrectness or inadequacy of any such return; or

(c) his failure to apply for registration as a taxable person under this Act,  the Commissioner may, on such evidence as may be available to him, assess the amount of tax due and that amount of tax shall be due and payable forthwith by the person liable to pay the tax.

POWER TO ADJUST AMOUNT OF TAX ASSESSED

The Commissioner MAY, in special cases referred to him by an authorized officer, adjust or review the amount of tax assessed for non-submission, failure to keep proper records or failure to register, in such manner as may be just and reasonable in the circumstances.

DEFAULT PENALTY FOR NON-SUBMISSION OF RETURNS

Rule 9 (2) of Schedule 7 provides that any registered person who fails to submit a return as required within the period allowed shall he liable to a penalty of Kshs. 10,000.00 or five percent of the tax due, whichever is higher.

This penalty subsists even where no supplied were made. Thus, rule 9 (2A) of the 7^th Schedule clearly states that a registered person who fails to submit a return (stating that no such supplies were made or received during the preceding month).

POWER OF COMMISSIONER TO REMIT PENALTY FOR NON-SUBMISSION OF RETURNS

Rule 9 (3) of the 7^th Schedule empowers the commissioner to grant remission of a default penalty in individual cases where he is satisfied that it is justifiable to do so and is required to make quarterly reports to the Minister on each remission so granted.  

Nonetheless, where the amount of the penalty exceeds five hundred thousand shillings, the grant of remission shall be subject to the written approval of the Minister.

In the present circumstances, none of the companies or business names have a default penalty liability of over Kshs.500,000.00. Therefore, Ministerial approval may not be necessary in our case should the Minister approve applications for remission of the default penalty.

VARIATION OF DATE OF REGISTRATION

Rule 9 of the 6^th Schedule empowers the Commissioner to vary the effective date of registration, where he is satisfied that there are reasonable grounds justifying such variation. As such, it is arguable that based on this provision and the dormant status of the companies, an application for variation of date of registration may be made with a view to effectively reversing default tax liability.

It is noteworthy that power to vary the date of registration is discretionary and exercise of the same in favour of an applicant is not guaranteed.

DE-REGISTRATION

Where companies have not been trading or trading below the statutory threshold for VAT, they do not qualify for registration for VAT. Accordingly, deregistration as a VAT registered entity should be pursued through a deregistration process.

Rule 16 of the 6^th Schedule provides that where the value of taxable supplies made by a registered person in any period of 12 months does not exceed Kshs. 2 million and the registered person does not expect any increase in such supplies in the next period of 12 months, he may notify the commissioner of the values of his supplies and may apply to be deregistered.

On receipt of such a notification, and if satisfied that the person should be deregistered, the Commissioner is obliged to deregister that person with effect from the date when the registered person pays the tax due and payable on supplies made. Accordingly, deregistration in subject to payment of any tax or penalty due, and in any event, will only be obtained if the Commissioner is satisfied that deregistration is necessary.

RECOMMENDATIONS

In view of the foregoing and in stances where companies are registered and PIN Certificates obtained together VAT registration, and followed by a period of inactivity, and failure in submission of monthly VAT returns, it is advisable that one pursue the following courses of action:

1. Begin filing nil returns for the VAT registered company either through a law firm or a tax consulting firm;
2. Request for a Demand Note for default penalties in respect of the company from date of registration for VAT to the date of request;  
3. Apply to the Commissioner to invoke his powers under Rule 9 of the 6^th Schedule to vary the date of registration for VAT and therefore reduce default penalty liability on the basis of dormant status of the company since incorporation;  
4. Apply to the Commissioner to invoke his powers under the proviso to Rule 9 (1) of the 7^th Schedule to adjust or review the amount of tax assessed for non-submission, or failure to keep proper, in such manner as he may deem be just and reasonable in the circumstances, on the ground that the companies are shelf companies and have been dormant since incorporation. An application of this nature will be forwarded to the Commissioner by an authorized officer (officer of KRA appointed under Section 3 of the VAT Act); 
5. Apply to the Commissioner to invoke his powers under Rule 9 (3) of the 7^th Schedule to invoke his powers to remit penalty for non-submission of returns on the basis that the companies have been dormant, the registrations for VAT were not authorized by clients (were obtained by an inadequately informed clerk, etc); and  
6. Apply to the Commissioner to de-register the VAT obligations of the companies on the basis that they are dormant and in fact are not eligible for VAT registration.

This is a formal option, and whose success will be at the discretion of the Commissioner, and often preceded by investigation on correctness of ground presented as basis of an application.  As such, whereas the company in question may be dormant and therefore ideal for grant of the various benefits, it is possible that the Commissioner may not grant any orders sought for reason of failure to submit even nil returns.

CONCLUSION

We hope the above advice will suffice your concerns regarding regularization your obligations in respect of monthly VAT returns. Nonetheless, you may contact us at info@stralexgroup.co.ke should you require further information or clarification. You may also call us on +254 715 310 677.

Yours sincerely,

For: Strategic Legal Solutions Group Limited

Taxlex Consulting Group - a participating tax and accounting consultancy firm in the SLS GROUP of consultancies.