One of the most common points of confusion for business owners in Kenya is whether they should be registered for Turnover Tax (TOT) or VAT. Getting this wrong can mean overpaying, underpaying, or falling out of compliance without realizing it. Here’s how the two compare.
1. What Is Turnover Tax (TOT)?
Turnover Tax is a simplified tax regime for small businesses with annual gross turnover between KES 1,000 and KES 25 million. It’s charged at a flat rate on gross sales, with no deductions for expenses — designed to make compliance simple for small and micro businesses that may not keep detailed accounting records.
2. What Is VAT?
Value Added Tax is charged on the supply of most goods and services, currently at 16% for standard-rated supplies. Unlike TOT, VAT allows you to claim input tax on eligible business purchases, but it also comes with more detailed filing, invoicing, and eTIMS requirements.
3. The Key Threshold: KES 5 Million
Businesses with an annual taxable turnover above KES 5 million are required to register for VAT, regardless of the nature of the business. Below that threshold, and up to KES 25 million, businesses generally fall under the TOT regime unless they choose otherwise.
4. Can You Choose Between Them?
If your turnover falls within the TOT band but your business model involves significant deductible expenses — or clients who require VAT invoices — you can opt into the VAT regime instead. This is a common choice for businesses supplying other VAT-registered companies, since those clients often need VAT invoices to claim their own input tax.
5. Which Costs You More? Rate and Deduction Differences
TOT looks simpler, but because it’s charged on gross turnover with no expense deductions, businesses with high costs relative to revenue can end up paying more under TOT than they would under VAT with input tax claims. The right choice depends on your margins, your expense structure, and who your customers are — not just your turnover figure.
6. What Happens If You Get It Wrong?
Registering under the wrong regime — or failing to switch when your turnover crosses the VAT threshold — can result in backdated tax assessments, penalties, and interest. Many businesses only discover the mismatch during a KRA review, by which point the exposure has grown significantly.
Not Sure Which Tax Regime Fits Your Business?
Intax Consultants helps businesses determine the right tax regime, manage the transition between TOT and VAT, and stay compliant as they grow. If you’re unsure where your business currently stands, talk to us before KRA raises the question for you.
