Important Records To Keep You Safe From The Tax Man
A couple of months back, every entrepreneur’s worst nightmare happened to us. The tax man came knocking for a tax audit. If you have kept up with the news, you know that KRA has been below target in their tax collections and they have gotten rather aggressive in their bid to recover lost ground, going after even the most faithful tax payers to find loopholes that could get them an extra cent.
First thing they did was ask for our business records for the last 7 years, including bank statements. Who still keeps copies of bank statements??
Anyway, after a grueling audit, I took out two key lessons on record keeping that I thought wise to share.
1. The 7 year requirement: The tax man requires you to keep your financial records for at least 7 years. Please bear in mind that this includes even the smallest sales receipt you have received, not just the big items. One difficulty I faced when trying to retrieve the records was that as staff changed, the filing system changed and some files got misplaced. If you’re tech savvy, here’s the Iron Mountain information management system that helps you digitize your most important records. Should you decide to keep it analogue, ensure that you manage your record keeping yourself to avoid document loss when you change accountants.
2. Maintain separate tax files: most diligent tax payers don’t think much of tax audits and will tend to file their tax payments together with all the other payments. Never do this. Maintain a separate file for each tax class you pay, and on each payment, attach a copy of the returns showing how you computed them. From experience, the following files are a must have:
– PAYE or income tax file showing your monthly payroll schedule, tax computation and copy of cheque.
– VAT or sales tax, with a copy of your VAT computation, a copy of your returns and cheque (monthly).
– Withholding tax file showing withholding tax deducted and paid to KRA, copies of cheque payment and withholding tax certificate given to the vendor.
– Annual tax returns file containing copies of your tax computation and returns filed by your auditors.
– Files for other statutory payments such as NHIF, NSSF, catering levy etc.
Finally, don’t make the mistake of thinking you can manage your taxes by yourself, no matter how simple your business may be, or even if you are a CPA! Invest in the advice of a good tax consultant to help you detect any loopholes in your business and accounting system that may cost you in taxes later.
