QUESTION ONE
- State and explain any four deductions that may be available against gains or profits from
employment. (2 marks)
- -NSSF contribution
- Owner occupied mortgage interest up to Sh.100,000 p.a.
- Contributions to have ownership savings plans up to Sh.48,000 p.a.
- Contributions by an employee to a registered pension and provident fund
- … of cost of tools and implements provided by architects, mechanics, engineers etc. in performance of employment services.
- Traveling expenses incurred in performance of duty.
QUESTION TWO
- Persons registered for VAT are entitled to input tax deductions for VAT paid on inputs which relate directly to their taxable supplies except where the law prohibits these as non-deductible.
List eight items that are prohibited for input tax deduction. ( 4 marks)
- Entertainment services
- Restaurant services
- Staff welfare costs
- Household or domestic electrical appliances
- All motor vehicles (other than passenger cars and minibus) bodies, pars and service for repair and maintenance of such vehicles.
- All fuels and oils for use in motor vehicles and such other bodies.
- Furniture, fittings and ornaments or decorative items in buildings other than items
permanently attached to the buildings.
- Passenger cars and mini-buses, parts and service for the repair and maintenance of such vehicles and the leasing and hiring of such vehicles.
- State the circumstances under which a registered person can qualify for bad debt relief as per the
VAT regulations. ( 2 marks)
Where the buyer (debtor) has become legally insolvent.
When the debt of a registered person (for which tax has been paid) remains unpaid for a 3 year period from date of supply.
- Briefly describe the procedure for payment of VAT on an imported service. ( 2 marks)
- Any input tax incurred in construction of a factory building is deductible against the output tax as the factory is not sold before the lapse of five years from the date it was first put into use.
- The VAT refund is due on 20th October 2000. However, this being a public holiday, its due on or before the last working day before 20th
- VAT on imported services
- This VAT is called reverse charge and is due and payable at the time the service is received or when payment is made for all or part of the service by importer.
- The VAT is declared through form VAT 7 and payment is made to the designate banks using form VAT 28.
- The VAT is allowable as a deduction against the output tax.
- Comment on any information not used in (i) above. ( 1 mark) Information not used
- Sales to Rwanda Miners Ltd – zero rated.
- 20,000 allowance to Rwanda Miners Ltd. – Zero rated hence no effect on
VAT computation.
- Stolen goods on transit – no VAT is charged since its on zero rate export
QUESTION THREE
“In my judgement, not every payment made to an employee is necessarily made to him as a profit arising from his employment. Indeed, in my judgement, the authorities show that to be a profit arising from employment the payment must be in reference to the services the employee renders by virtue of his office, and it must be
something in the nature of a reward for services past, present or future”. Justice Upjohn in Hochstrasser v–Mayes (1960) 38 TC 673.
Required:
In the light of the above judgement and the relevant provisions of Income Tax Act (Cap 470) of the laws of
Kenya, explain the tax benefits arising out of the use of the following in the design of an
“Executive Remuneration Package”.
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- Expense reimbursement. (4 marks)
- Reimbursement of personal expenses constitutes a taxable benefit. The assessed benefit will be equivalent to the cost of the employer. Consequently, this scheme does not have any benefits if the reimbursement is for personal expenses. The reimbursement of expenses incurred in the course of carrying out the business of the employer does not constitute a taxable benefit. Here, it is assumed the reimbursement is for the actual cost incurred by the employee. If the amount reimbursed exceeds the cost to the employee, the difference will be subject to tax.The personal expenses reimbursed will be tax deductible by the employer if the employee has been taxed. Reimbursement of business expenses is tax deductible if the employee has been taxed. Reimbursement of business expenses is tax deductible if the expenditure is incurred wholly and exclusively for the purpose of the business
- Benefits in kind(4 marks)
- Benefits in kind are taxable, unless the aggregate value does not exceed Ksh.24,000 p.a. This amount is not significant enough to be included in an “Executive Remuneration Package”. Other benefits not subject to tax include:Medical services to full time employees;Employer‟s contribution to a pension or provident fund (whether registered or not);
Education fees of an employee‟s dependents, where treated as a non-deductible
expense by theemployer;
Passages between Kenya and any place outside Kenya for expatriates.
- Pension entitlement (4 marks)
- Contributions by an employer to a pension or provident fund, whether registered or not are not taxable on the employees. However, the employer is not allowed to deduct contributions to nonregistered schemes. The employees can benefit from these schemes but may not be tax efficient because the employer will be taxed on the contributions.
- Bonus Schemes(4 marks) Bonus SchemesBonuses constitute cash payments to employees. All cash payments received as a gain or profit from employment are taxable in full. This item will not be tax effective to be included in a remuneration package.
- Share Purchase arrangements for employees. (4 marks) Where the shares are redeemable, the taxable benefit shall be the higher of the difference between: issue price and nominal value; orissue price and redemption value.
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QUESTION FIVE
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- List thee circumstances under which:
- The income of a taxable person is assessed on another person. A married woman living with her husband may be called upon to bear the burden of tax.
- Briefly describe the treatment of the following classes of taxpayers with regard to Pay As You Earn (PAYE):
- Deceased person income assed on executors or administrators
- Incapacitated persons and minors – income assessed on guardian or trustee.
- Married women – income not earned at arms length assessed on the husband -Non-resident ship – owners – income assed on the captain of the ship
- Payment of tax by a married woman living with the husband.
- Where the husband has been declared bankrupt
- Where the husband is of unsound mind
- Where the husband does not have distrainable goods
- Where the husband does not have any taxable income (wife is the sole bread winner) The husband is untraceable or has gone underground.
Casual workers. – casual workers who are engaged by the employer for periods less than one month are not taxable. However, if the casual worker is employed regularly he will be taxed
Taxpayers with multiple sources of income
Multiple sources of income
These are taxed on all incomes but granted personal relief only by the “main employer”
- What circumstances may trigger a Pay As You Earn (PAYE) audit? ( 5 marks)
- Salaries and wages figure per the audited accounts is higher or lower than the amounts reflected
in the PAYE returns.
- PAYE is usually not paid on time
- Material fluctuations over the months on PAYE payments
- Third party information or complaints
- Non-compliance noted/detected during a normal tax examination be it VAT or Corporate tax examination.
- Off-late KRA is offering rewards to anybody who divulges information that leads to a tax
recovery by authorized persons only.
- Newspaper reports
- Court cases
- Construction sites sign boards – This affects mainly contractors and professionals in the
construction industry.
- Information emanating from related companies audited
- Cessation of business on a large part of a business
- Higher salaries awarded to middle level managers compared to those awarded to their seniors.
- What tax set-offs are available to an individual taxpayer which may reduce the gross tax liability?
( 5 marks)
- PAYE deducted at source
- Double taxation relief
- Personal relief
- Any installment tax paid
- Withholding tax on non-qualifying dividends and royalties income
- Tax refunds of previous years of income.
(Total: 20 marks)
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