In an unfortunate turn of events, employees are finding PAYE liabilities applied to their individual accounts. This is discovered when the employee attempts to make an application for a Tax Compliance Certificate (TCC). Through this action, the Kenya Revenue Authority (KRA) is in effect holding the employee accountable or liable for unpaid PAYE liabilities. In most cases, these liabilities are often many years old, and from past employers who may no longer exist.

This article tries to clarify the legal position under the Income Tax Act and attempts to offer practical solutions to help affected taxpayers. This article is not intended to be legal advice. Make sure to consult with a qualified legal or financial expert to handle your matter.

PAYE: A Breakdown

Pay-As-You-Earn (PAYE) is a tax deduction system established under Section 37 of the Income Tax Act, Cap 470. PAYE is charged based on a graduated scale. The first Kshs 24,000 of income is exempt from taxation. PAYE is filed and remitted by your employer. The employer is responsible for deducting it from the employee’s salary. It is our considered opinion that once the deduction is made, the employee’s tax obligation should be considered fulfilled. This is because the employee has no control over the filing and remittance process.

The Employer’s Legal Obligations for PAYE

Several sections of the Income Tax Act clarify the roles and responsibilities of the employer and the employee as to the payment of PAYE:

1. Section 37(1):
   Employers must deduct tax from employee earnings at the time of payment.
2. Section 37(2):
   Employers must remit these deductions to KRA by the 9th day of the following month.
3. Section 72D: Imposes penalties and interest on employers who fail to remit PAYE on time charging a penalty currently set at Kshs 10,000 and interest at 1% per month.
4. Section 5:
   Defines taxable income, ensuring that employees’ earnings are subject to PAYE deductions based on tax bands.

These provisions make it clear that the employer bears the full responsibility for deducting and remitting PAYE.

Why an Employee Should Not Be Liable for PAYE

The Income Tax has no provisions for fines or interest ( together referred to as penalties) to an employee for their employer’s non-compliance. Here is what it provides instead:

1. No Legal Authority to Remit Taxes:
   Employees cannot remit PAYE directly. The employer is the appointed tax agent under the law.
2. Employees Have Already Paid:
   Once PAYE is deducted from an employee’s salary, the employee has fulfilled their tax obligation.
3. Case Law Support:
   Kenyan courts have upheld that employees cannot be penalized for their employer’s failure to remit PAYE.

The Current Problem: TCC Denials

KRA’s iTax system automatically flags unpaid PAYE liabilities, even if they result from the employer’s failure to remit. This blocks employees from obtaining a Tax Compliance Certificate (TCC), which is essential for:

• Bidding for tenders.
• Applying for jobs, loans, or licenses.
• Meeting personal and business obligations.

What Can You Do If Denied a TCC?

If you’ve been denied a TCC due to unpaid PAYE, follow these steps:

1. Check Your iTax Account:
   Log into the KRA iTax portal and confirm the details of the flagged PAYE liability.
2. Engage Your Employer:
   Contact your employer to address the issue. They may need to reconcile their tax accounts and remit the outstanding amounts.
3. Provide Proof of Deduction:
   Submit your payslips as evidence that PAYE was deducted from your salary. This serves as proof that you’ve met your tax obligations.
4. File an Objection with KRA:
   Under Section 51 of the Tax Procedures Act, you can object to the TCC denial. File your objection through iTax, providing all relevant documentation, including payslips and employment contracts.
5. Seek Professional Assistance:
   If the issue persists, consult a tax lawyer and or tax accountant. Both of these professionals can help you navigate the objection process.

Preventive Measures for the Future

To avoid future issues, consider the following:

• Request Regular Payslips:
  Ensure your payslip reflects PAYE deductions every month. Keep copies of your payslips in case you need to produce them as evidence later on.
• Monitor Your iTax Account:
  Regularly check that your employer is remitting PAYE by applying for a Tax Compliance Certificate especially annually as you file your individual tax returns
• Seek Professional Guidance:
  Enlist the help of a tax accountant or lawyer to ensure your compliance status remains intact.

Conclusion

The denial of TCCs due to unpaid PAYE can be frustrating, especially when the fault lies with the employer. However, employees have recourse. By understanding your rights and taking proactive steps, you can resolve these issues efficiently.

Facing issues with KRA or TCC denials? Our Tax and Wealth Management Advisory team can help you file objections, liaise with KRA, and protect your compliance status. Schedule a consultation today for expert assistance.