💡 Introduction
Running a business in Kenya is tough — taxes shouldn’t make it harder. Yet every year, thousands of Kenyan SMEs lose money, face penalties, or get flagged for audits, not because they’re intentionally non-compliant…
but because they simply don’t know the rules.
This guide breaks down the top 10 tax mistakes Kenyan SMEs make, based on:
- KRA desk audit trends
- VAT Auto-Populated Return mismatches
- eTIMS rollout issues
- Common SME record-keeping gaps
- Finance Act 2025 updates
- Income Tax & VAT Act requirements
Use this as a diagnostic checklist for your business. If you spot 2 or more issues — it’s time to realign your compliance.
1. Not Using eTIMS (or Not Using It Correctly)
KRA now expects every business that sells goods or services to issue eTIMS invoices.
Common SME errors:
- Issuing handwritten or PDF invoices
- Not transmitting invoices
- Using non-registered POS systems
- Forgetting to issue credit notes
Risks:
- VAT claims rejected
- Supplier blocked
- Input VAT invalidated
- Penalties up to KSh 1 million
Solution:
- Register for eTIMS
- Issue invoices for ALL sales
- Reconcile eTIMS vs Auto-Populated VAT every month
2. Filing Nil VAT Returns When You Had Sales
KRA’s systems now detect:
✔️ eTIMS invoices
✔️ M-PESA flows
✔️ Bank deposits
✔️ ICMS imports
✔️ ETR data (before migration)
If VAT is due and you file NIL:
→ You trigger an automatic audit flag.
→ Penalties apply (KSh 10,000 or 5% of tax due).
Solution:
Always file actual VAT — or update your tax obligation if you no longer trade.
3. Misclassifying Expenses (Especially Motor Vehicles & Fuel)
Under Section 17(4) VAT Act, SMEs cannot claim input VAT on:
❌ Double cabs
❌ SUVs
❌ Sedans
❌ Station wagons
❌ Repairs & maintenance for passenger vehicles
❌ Fuel for non-qualifying vehicles
Solution:
Use a VAT eligibility checklist before claiming input tax.
4. Ignoring Withholding Tax (WHT)
SMEs often forget that WHT applies when paying:
- Consultants
- Rent
- Transporters
- Professionals
- Internet/comms
- Commissions
- Management fees
Mistakes:
- Not deducting
- Deducting wrong rate
- Using wrong PIN
- Not remitting on time
Penalties:
- Up to 10% of tax undeducted + 5% late remittance penalty.
5. Poor Payroll Compliance (PAYE Mistakes)
PAYE errors are one of the highest contributors to SME penalties.
Common issues:
- Not registering for PAYE
- Incorrect tax calculations
- Not remitting by 9th
- Missing NSSF/NHIF deductions
- Unregistered employees
- Staff paid in cash but not declared
Solution:
Use a payroll calculator + monthly PAYE checklist.
6. Missing or Weak Record-Keeping
Under the Tax Procedures Act, SMEs must keep records for 5 years.
Records required include:
- Sales invoices
- Purchase invoices
- Delivery notes
- Receipts
- Bank statements
- Payroll records
- Inventory logs
- Import entries (ICMS)
- Contracts
Failure to produce these during an audit = automatic adjustments.
7. Incorrect VAT Classification (Zero-Rated vs Exempt)
Many SMEs incorrectly classify:
- Food items
- Pharmaceuticals
- Financial services
- Educational services
- Exported services
- Agricultural supplies
This results in:
- Underpayment or overpayment of VAT
- Auto-Populated Return mismatches
- KRA assessments
Solution:
Create a VAT classification matrix for your business.
8. Not Reconciling eTIMS With the VAT Auto-Populated Return
From mid-2024 onward, VAT returns are pre-filled by KRA from:
- eTIMS
- ICMS
- WHT credits
- Credit notes
Common errors:
- Untransmitted invoices
- Wrong PINs
- Old-style ETR invoices
- Supplier mismatches
- Missing imports
Solution:
Monthly reconciliation of:
- eTIMS Sales
- eTIMS Purchases
- Credit Notes
- VAT Auto-Pop Return
9. Not Declaring Side Income (Freelancing, Online Income, Extra Jobs)
KRA cross-checks:
- Bank deposits
- M-PESA
- Payments received from companies (via WHT)
- Digital income (e.g., Fiverr, YouTube, TikTok, Upwork)
SMEs with undeclared digital income risk:
- Assessments
- Late payment interest
- Investigations
Solution:
Declare all business + digital income annually.
10. Applying Wrong Tax Rates or Ignoring Finance Act Updates
SMEs often miss changes in:
- VAT rates
- WHT rates
- PAYE bands
- Excise duty updates
- DST rules
- Minimum Tax removal
- Turnover Tax rules
- Motor Vehicle VAT rules
Solution:
Review Finance Act changes at least once a year.
Conclusion
Most SME tax problems come from avoidable mistakes — not intentional evasion.
With better systems, accurate records, and proper understanding of tax rules, your business can stay compliant, save more money, and avoid unnecessary penalties.