Why PAYE Audits Are Increasing
The Kenya Revenue Authority has significantly increased the frequency and depth of PAYE audits over the past two years, driven by improved data matching capabilities through the iTax system and third-party data from NHIF, NSSF, and banks. Employers who have not reviewed their payroll compliance recently are at elevated risk.
The Most Common PAYE Audit Triggers
1. Inconsistencies Between P10 Returns and Payment Records
KRA's systems automatically flag employers whose monthly P10 declarations do not match their payment receipts. Even minor discrepancies — such as rounding differences or delayed amendments — can trigger a desk review.
2. Low Effective Tax Rates Relative to Industry Benchmarks
KRA benchmarks PAYE collections against industry averages. Companies with effective tax rates significantly below peers are selected for review.
3. Excessive Non-Taxable Benefits
Housing allowances, car allowances, and medical benefits are taxable in most circumstances. Employers who classify large portions of compensation as non-taxable benefits are frequently scrutinised.
4. Director Remuneration
Director fees and compensation are a common area of non-compliance. KRA pays close attention to the relationship between declared director remuneration and company profitability.
5. Casual and Contract Workers
Payments to casual workers are subject to withholding tax at 5% if the worker earns below the PAYE threshold, or at marginal rates if above. Many employers incorrectly treat all casual payments as outside the PAYE net.
Preparing for a PAYE Review
If you receive a PAYE audit notice, take the following steps immediately:
- Gather P9, P10, and payment receipts for the review period
- Reconcile total payroll to audited financial statements
- Document the tax treatment of all non-cash benefits
- Engage a qualified tax adviser before responding to KRA
Our tax team has successfully managed numerous PAYE audits and can help you prepare a robust response or conduct a voluntary review before KRA contacts you.