Many small and medium-sized enterprises (SMEs) in Kenya tend to overlook a critical risk that could prevent them from reaching their 10th anniversary: Tax Compliance! Although taxation has existed for centuries, it is frequently neglected, with compliance often addressed only when a tax auditor comes calling.

Ensuring tax compliance is essential for the success of SMEs in Kenya. By implementing effective strategies such as understanding their tax obligations, utilizing available incentives, keeping accurate financial records, staying updated on tax regulations, and being audit-ready, SMEs can fulfill their tax duties while maximizing their financial performance.

Moreover, SMEs should only register for tax obligations that are relevant to their operations. Incorrectly registering for taxes that do not apply to their business not only increases compliance burdens but also exposes them to potential penalties due to non-filing or late filing.

Below are key tax considerations that SMEs in Kenya should keep in mind:

i. Invoicing

All taxpayers, including SMEs, are now required to generate and transmit invoices electronically through the electronic Tax Invoice Management System (eTIMS). In recognition of the challenges faced by smaller businesses, the Kenya Revenue Authority (KRA) has introduced eTIMS Lite, a simplified invoicing platform for businesses. These solutions are accessible through the eCitizen platforms via:

• USSD invoicing solution: *222#

• Web-based invoicing solution: ecitizen.kra.go.ke

SMEs can use eTIMS Lite to raise invoices without going through the more complex full registration process. Importantly, businesses should ensure they issue and receive eTIMS-compliant invoices from their suppliers to remain fully compliant.

ii. Turnover Tax (TOT)

To ease the compliance burden for smaller enterprises, Turnover Tax (TOT) under Section 12C of the Income Tax Act has been implemented. TOT applies to resident businesses whose annual gross turnover exceeds KShs. 1 Million but does not surpass KShs. 25 Million.

Under TOT, SMEs are required to file a return and pay tax by the 20th day of the month following the end of each tax period and the applicable TOT rate is 1.5% of the gross receipts (sales) of the business. No deductions are allowed under TOT, and this tax is considered final, meaning SMEs do not need to file an end-of-year income tax return for the TOT income. The simplicity of the TOT framework makes it ideal for smaller businesses with limited accounting capacity. Additionally, TOT does not require complicated bookkeeping as only daily records of sales need to be maintained.

SMEs that qualify should consider opting into the TOT regime to reduce compliance complexity and associated costs.

iii. Value Added Tax (VAT)

SMEs supplying or expecting to supply taxable goods and taxable services with a value of KShs. 5 Million or more in a year are required to register for VAT. Where an SME has not attained the KShs. 5 Million threshold, voluntary registration can also be granted.

Enterprises should ensure that they register, when applicable, for the obligation on time and file and remit taxes on time, 20th day of the following month. The taxpayer should also be keen to ensure that Input VAT incurred in the generation of the product is declared in order to benefit from the reduction of the Output VAT payable.

SMEs should also ensure they capture Input VAT from purchases related to the business to offset against Output VAT. This has the effect of reducing the VAT payable and thus reduces the business’s outflow significantly. Where due to various reasons, an SME registered entity has ceased making taxable supplies it should consider applying for deregistration of the obligation to reduce compliance expenses incurred in the monthly filing of the obligations.

iv. Pay As You Earn (PAYE)

SMEs that employ staff are required to deduct PAYE from employees' salaries and remit it to KRA by the 9th day of the following month. It is important to take advantage of statutory reliefs and allowable deductions.

Although PAYE is ultimately borne by employees, the legal responsibility lies with the employer. Non-compliance through under-deduction, non-remittance or late payment results in penalties and interest for the enterprise.

v. Withholding Tax (WHT)

SMEs should ensure that they deduct WHT on payments of applicable incomes to payees and remit the tax so deducted to the Commissioner of Domestic Taxes Department within 5 working days after the deduction is made.

Failure to deduct or remit withholding tax results in the business being liable for the tax, plus penalties and interest. SMEs must therefore understand which payments attract WHT and ensure timely compliance.

Other Considerations

vi. Strengthening Financial Record-Keeping

Effective financial record-keeping is not just a regulatory requirement; it is a fundamental aspect of sound business management. SMEs should prioritize maintaining organized and accurate documentation to support both their tax filings and overall business decisions.

This involves investing in simple accounting software or mobile-based bookkeeping tools that streamline the recording process. It is essential to consistently maintain records of daily sales, business purchases, and bank transactions, while also organizing receipts, invoices, and payment vouchers in either physical or digital formats. Regular reconciliation of financial records is equally important, as it allows businesses to identify and correct errors early.

Good records not only make tax compliance easier but also strengthen the business's credibility with lenders, investors, and the KRA.

vii. Leveraging Expert Tax Support

Engaging a qualified tax consultant or accountant can provide critical support by helping SMEs optimize their tax planning and take full advantage of available incentives. Tax professionals also play a vital role in minimizing common filing errors, which reduces the risk of incurring penalties.

In addition, they ensure that the business remains compliant with new or evolving tax regulations, which can often be difficult to track independently. Professional advisors are also instrumental in representing the business during KRA audits or compliance reviews. SMEs should regard professional tax advice as a strategic investment that protects the business from financial risks and supports long-term stability.

Conclusion

The tax landscape for SMEs in Kenya is evolving, bringing both opportunities and challenges. With ongoing reforms such as digital invoicing and simplified tax regimes, the Government aims to foster a more inclusive and compliant business environment.

However, tax compliance is not a one-time activity, it is a continuous process that requires planning, awareness, and discipline. SMEs must take ownership of their tax obligations by embracing modern tools like eTIMS Lite, selecting the most suitable tax regimes (such as TOT), and seeking professional guidance when necessary.

By building a culture of compliance, SMEs do not only avoid costly penalties but also unlock their full growth potential. Ultimately, a tax-compliant SME is a resilient, competitive, and future-ready enterprise well-positioned to celebrate milestones well beyond its 10th anniversary.