Are you a registered taxpayer looking to (legally) reduce your tax bill? In this post, we show you how individuals and small businesses can reduce their tax liability using tax management and tax planning services.
Tax is a financial charge imposed by the government on you to fund its public sector goals and other expenses. Each economic system (county, state or city, etc.) have its independent tax laws.
What happens if you don’t file your KRA taxes?
What if I don’t file taxes on time? A Tax regime or code can be complex for majority of individual and company taxpayers. It outlines the types of tax deductions, exemptions and benefits for you. Besides it has timelines and penalties for failing on any tax obligation among other areas.
Your failure to comply with your area’s tax obligations is a punishable offence. The failures may include;
- Failure to file your tax returns on time
- Failure to pay taxes by the set deadline
- Failing to make deposits on certain taxes
The above tax failures may lead to dire consequences that may include but not limited to.
- Litigations: Expensive court or unending legal battles with the tax agency e.g Kenya Revenue Authority (KRA) in Kenya or the IRS in the US.
- Increased tax liabilities: Taxer can charge Penalties and interests on you
- Disrupted Business operations: Your Tax regulator may disrupt or distract usual business for audit purposes o
- Forced shutdown; Tax regulator can compel you to close your business temporarily or permanently.
Outsourcing your tax handling to a qualified tax consultant can save you some money and time as well as enhance your compliance. In the section below, we outline the differences between tax management and tax planning. Besides, the post includes the top benefits for you.
What is tax management?
Tax management simply means the practice of maintaining and paying taxes as per your tax laws and obligations.
It’s a component of finance management. It entails compliance with applicable tax laws for the taxpayer to file returns and pay tax liabilities on time. Its essence is to ensure full compliance with tax laws to avoid tax penalties and or interest charges.
What is tax planning?
Tax planning simply means using the available tax law provisions to averse your tax obligations in order to improve your future financial position.
Tax planning entails taking the maximum advantage of the applicable allowances, deductions, concessions and rebates being within the tax framework. You will therefore adopt provisions that relieve you of tax liabilities using tax statues without deceiving the law.
Tax planning has three major benefits or objectives.
- To lower your overall income and/ or capital gain for the taxpayer. As such, your overall tax liability is reduced through legal tax benefits and exemptions.
- To Maximize your investments by redirecting your taxable income into retirement plans, life assurance or other investments.
- Reduce your compliance risk exposure by having a tax plan that complies with all law.
What are the key differences between Tax management and Tax planning?
Most taxpayers think tax planning and tax management are the same thing. However, you should realize the key focus of tax planning is to reduce taxpayer’s tax liability. On the other hand, tax management essentially ensures your adherence to tax laws in order to reduce tax. Other major differences are summarized on the table below.
|Areas of Comparison||Tax Planning||Tax Management|
|Objective||Done to minimize tax liability legally.||Done to adhere/comply with the tax laws and other allied provisions|
|Relationship||Tax management is a subset of tax planning||Involves routine tasks such as timely filing, record keeping and tax deductions.|
|Time||Its focus is the future||Done for past, present and future financial years such as making deposits and making corrections|
|Usage||Used in advance to minimize short term and long-term tax obligations||Used sustainably to avoid penalties, interests and prosecutions|
Types of Tax Planning
Are you wondering what you can do to reduce your tax liability? There are four common methods of tax planning in practice;
- Short-term tax planning: Done yearly at the end of each fiscal year to identify and use available tax savings. used to limit one’s tax liability without any long-term investments.
- Long-term tax planning: This plan is used by a taxpayer for coming financial year(s). It involves future investment commitments that reduce your taxable income. An example is investing in life insurance and mortgages for coming years for individuals.
- Permissive tax planning: This method involves planning to use tax saving instruments and vehicles under various provisions of the applicable taxation laws of your jurisdiction. Such provisions include deductions, exemptions, contributions, and incentives.
- Purposive tax planning: This method involves selecting various tax-saver instruments to achieve a specific goal. This may include, selecting of investment types, replacing assets and diversification of business and individual incomes.
What you need to know about Tax planning in Kenya
Are you an individual or a small business in Kenya looking to reduce your tax liability? There are specific legal provisions which apply to you as an individual or business as discussed on separate posts. In the list below we give you the general tips to manage and plan for your tax.
Updated Record Keeping
Invest in proper and accurate record keeping as an individual or business. These will help in accounting for your income generation and other investment activities.
By using records, it’s easier to support documentation for your allowable deductions from your gross income.
In case of legal proceedings or tax audits against you, accurate records serve as reference documents for you.
The easiest method to avoid your exposure to tax challenges is compliance. Ensure you file, deduct and pay all your obligations on or before the set KRA deadlines for VAT, PAYE and Income taxes. A tax consultant or manager can maintain your tax calendar at an affordable fee.
Take advantage of the Voluntary tax disclosure program (VTDP)
From time to time a tax regulator will design programs to help taxpayers to comply with tax laws.
Currently, KRA has a 3 year’s VTDP program running from 1st January 2021 to 31st December 2023. It will help you to voluntarily declare any pending liabilities and settle any principal tax.
If you pay the principal tax within the 3 years, you will be entitled to waiver on penalties and interest as follows;
- 100% waiver, if the principal tax is disclosed and paid within the calendar year 2021;
- 50% waiver, if the principal tax is disclosed and paid within the calendar year 2022;
- 25% waiver, if the principal tax is disclosed and paid within the calendar year 2023.
Utilise Legal Tribunals
Tax laws in Kenya allows for individual and company taxpayers to challenge any assessments on tax liabilities in various ways. These include applications to the commissioner, legal tribunal or courts.
Outsource your tax management and planning services
Timely, competent and relevant tax advice maybe the difference between your financial success and failure.
When you commit these tax management roles outside it will give you an opportunity to focus on your company’s core business. It will also ensure your full compliance with law. Besides, it will expose you to other tax reduction strategies.
In Kenya you can easily access professional tax consultants both an individual and a firm such as the Trailblazers Consulting. When looking for one, consider their reputation, certification in relevant professions such as Certified public accountant (CPA).
In consulting, remember, CPAs do not cost you money, they save you money.