A large number of registered tax payers can confirm receiving VAT inconsistency reports generated by the iTax system. They usually come in the form of spreadsheets listing entries that are considered to be inconsistent and began with Value Added Tax (VAT) returns for the month of January 2019.
The Kenya Revenue Authority (KRA) introduced a VAT Automated Audits system (VAA) module on iTax in October 2018 that is able to match the Input VAT declaration made by purchasers with the Output VAT declared by sellers. The system generates an inconsistencies report and communicates this to both the buyer and the seller. This was in a bid to enhance VAT tax compliance.
What are VAT inconsistencies and how do they come about?
In every transaction in the supply chain where VAT is applicable, there are two participants:
- The seller, a taxpayer who is registered for VAT for the provision of goods and/or services and;
- The purchaser, who in this context, we will refer to as a buyer who is registered for VAT.
The seller is required by law to declare and remit the VAT charged (Output VAT) in a particular month by the 20th day of the following month. On the other hand, the purchaser is required to declare the VAT charged on a purchase made (Input VAT) within a period of six months from date of invoice.
A VAT inconsistency is raised where any of the following invoice details as captured by the seller and the buyer in their respective returns do not match:
- Invoice number
- Invoice date
- Supplier/purchaser tax Personal Identification Number (PIN)
- Transaction amount
Common causes of the above, from our experience, are:
- Inaccurate data capture in the VAT return by either the seller, buyer or both.
- Non-declaration i.e. the seller fails to declare the sale in their VAT return.
- The seller declaring vatable sales as a lump sum figure without specifying the tax PINs of their customers.
- Foreign exchange differences arising as a result of different exchange rates used while filing their returns by both parties.
- The purchaser wrongly claiming input VAT on zero-rated or exempt supplies.
What happens when a VAT inconsistency report is generated?
The inconsistency report is sent via email to the both the affected purchaser and seller. The two are given 15 days to resolve the inconsistency and file an amended return for the month in question. A further 15 days are granted in instances where they are unable to resolve the inconsistencies within the period given.
If there is no resolution of the inconsistencies, the system will generate a report of outstanding inconsistencies and disallow related input VAT. This could create a tax liability for the purchaser or reduce the credit balance if they were in a credit position.
If the assessed amount remains unpaid for a period of 30days, debt enforcement and recovery measures will take effect.
What Should You do when you get a VAT Inconsistency report?
DO NOT IGNORE IT!
- You may have declared incorrect invoice details listed above. File an amended return reflecting the correct details
- Your supplier may have declared different details from those on your invoice. Reach out to them, if possible, to amend their return.
- The details may be correct as declared. Contact KRA with documentary proof so that the matter is resolved.
- Seek support from your tax consultants where not clear how to deal with the issue.
The VAA process was put on hold when the Covid-19 pandemic arose but you can be sure KRA will resume from where it left off when the situation normalizes.
Even with this system in place, the process is still marred by a myriad of challenges including insufficient response time given the volume of the data uploaded in the system and the number of inconsistencies being generated.
We propose the following measures to reduce the incidence of inconsistencies and better manage the VAA process:
- Diligence in completing monthly VAT returns to avoid data capture errors. Consider subjecting the completed return to review by a second party before filing.
- Ensure completeness of sales and Output VAT declared by reconciling the amount declared to the accounting system.
- Avoid declaring sales in lump sum. This field in the VAT return should only be used for sales made to taxpayers not registered for VAT. Sales made to VAT registered customers should be captured individually.
- Agree with your supplier, where possible, the transaction exchange rate for transactions denominated in foreign currency.
- Ensure proper filing and retention of documents related to your business transactions. These come in handy where documentary proof is requested or required.
KRA should also consider giving taxpayers more time to respond to inconsistency reports. A minimum of 30 days would be more appropriate.
For support and/or additional information with regard to VAA, please contact:
Outsourced Services Manager
t +254 715 248882 | +254 733 533449