KRA gives landlords March deadline to pay rental tax

The Kenya Revenue Authority (KRA) has set a March tax compliance deadline for the more than 100,000 landlords who have not been paying rental income tax since its coming into force in January.

The KRA expects the landlords to receive a compliance notice by end of next month, paving the way for assessment of taxes due from those who will have failed to respond and issuance of demand notices for taxes due before moving in to enforce.

“So far (since January 2016), more than 12,000 compliance notices have been sent to landlords,” Ruth Wachira, the acting Commissioner for Domestic Taxes told the Business Daily, adding that the taxman intends to serve compliance notices to more than 100,000 landlords by end of March.

Treasury secretary Henry Rotich last June introduced rental income tax chargeable at a flat rate of 10 per cent aiming to collect Sh10 billion from it annually.

The new tax, which became effective January 1, is a simplified form of an earlier one and is meant to ease the taxman’s assessment and dealing with the defaulters.

Annual targets

The KRA is targeting residential and commercial areas with high concentration of buildings that can yield substantive amounts of money to help meet its annual revenue targets.

READ: Tough times ahead as KRA misses half-year revenue target

“For those who fail to respond by end of March 2016, KRA intends to estimate residential rental income tax due from the property information available and take various enforcement measures provided in the law,” said Ms Wachira.

The taxman expects to have surveyed the entire city of Nairobi by June and is said to have already covered part of the central business district, Imara Daima, Lang’ata, Zimmerman, Jacaranda Gardens, Dagoretti, Ngong Road and Donholm estates.

Among the options available to the KRA in dealing with non-cooperative landlords are having tenants pay rent directly to the taxman until the debt is settled, taking any cash in the landlord’s bank account and, in extreme cases, seizing and auctioning the property.

The Treasury has set for the KRA a target of Sh10 billion to be collected from landlords by June this year, further piling pressure on the taxman to go after defaulters.

The tax agency has in recent months been collecting information on landlords and plans to use the same to calculate taxes.

Information gathered includes the landlord’s name, postal and telephone contacts, details of property owned as well as the rental receipts from all units.

The information is being collected from tenants, various government institutions such as the National Housing Corporation and county governments.

READ: KRA seeks agents to collect data on rental income tax

ALSO READ: KRA sets tax deadline for landlords

“Take notice that…the commissioner of domestic taxes requests that all landlords and tenants fill in the attached form with the details requested,” KRA said in a January 26 letter to NHC’s Lang’ata Court Residents Association.

“The forms shall be collected from the chairlady of the estate welfare group committee. This should be within a period of seven days from the date of this notice.”

Higher tax demand

Failure by landlords to declare and pay their rental taxes exposes them to a higher tax demand than they would pay voluntarily.

For instance, a tenant with 10 housing units at a monthly rent of Sh10,000 is expected to pay Sh12,000 in taxes a year but the amount could be lower if some units are not occupied.

In the event that the landlord fails to declare and pay the tax, the KRA is allowed to estimate the total amount due on the assumption that all the units were occupied besides penalties.

The standard procedure in recovery of amounts owed is for the revenue department of the KRA to send an estimate of taxes owed together with a 30-day demand notice for payment.

If the landlord fails to respond, he is sent a 14-day reminder after which the case is moved to KRA’s debt recovery department which  issues a similar demand notice indicating the amount owed, penalties and interests.

Failure to honour this second demand, invites another demand notice of seven days after which the defaulter receives a final notice that also serves as an immediate demand letter.

“After the immediate demand notice is served, the officer may use enforcement tools to recover the debt, including but not limited to Agency Notice, caveat, distress warrant and court suits,” the KRA manual says.

An agency notice is issued to all third parties that hold the landlord’s money or owe him. In this case, the KRA contacts the tenants and the landlord’s bank asking them to remit any money they are holding or ought to pay to the property owner.

While the March assessment will be for rental income tax from January, the KRA will conduct another assessment in July, this time for the backlog of taxes that were not paid for the period up to December 2015.

Tax amnesty

The two assessments are treated differently because of the different tax rates. Mr Rotich last year gave landlords a one-year amnesty on all unpaid rental income taxes for the period up to December 2015.

READ: Rotich sets tough conditions for rental income tax waiver

The amnesty offers a waiver on all unpaid rental income tax before January 2014 and further waives penalties and interest for 2014 and 2015.

This means landlords who take advantage of the waiver are expected to pay taxes for 2014 and 2015 with no penalties.

The amnesty ends in June this year, after which the KRA is expected to assess compliance before taking action. The amnesty is, however, restricted to individuals who earned rental income of Sh10 million or less.

Failure to pay the amount during the amnesty period gives the KRA the authority to conduct a fresh assessment of taxes due dating back up to seven years (2009).

“If they (landlords) fail to take advantage of amnesty, KRA will enforce payment of tax for all previous years (law allows the tax agency to go back for seven years if the properties existed then) after expiry of amnesty in June,” Ms Wachira said.

The plan to actively go after landlords has been on the cards for years but the complexity of administering the tax has meant that the KRA has been unable to effectively tax the hundreds of thousands of small property owners.

Previously, the tax on rent was calculated on graduated bands similar to personal income tax. One was allowed to deduct costs like land rates, insurance and utilities before arriving at the taxable amount, further complicating the assessment.

The amnesty and the flat rate tax only applies to individual landlords and companies who earn less than Sh10 million from residential property annually.

Commercial properties and landlords who earn more than Sh10 million annually will pay a corporate tax of 30 per cent.