For years, many small businesses paid for goods and services with a handwritten receipt or no receipt at all and deducted the cost anyway. The move to electronic tax invoices through KRA's eTIMS system has changed that: the invoice you get from a supplier now decides whether your expense counts.
What changed
Under recent law and KRA guidance:
- To deduct an expense when working out taxable profit, a business is expected to hold a valid electronic tax invoice for it.
- To claim input VAT, a VAT-registered business needs a valid tax invoice that carries its KRA PIN.
- Suppliers must issue eTIMS invoices for their sales, whether or not they are VAT-registered.
The details, such as exceptions and the date from which each rule applies, come from the Finance Acts and KRA notices, so check the current position. Our guide to eTIMS e-invoicing explained covers what the system is and how to join.
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Why it matters to you
An expense without a valid invoice can be disallowed, which raises your taxable profit and your tax. If you claim VAT on it, the claim can be rejected. Expenses that used to cost you nothing in tax terms now carry a hidden cost if the invoice is wrong.
An example
Your annual costs include KES 800,000 paid to suppliers who did not issue eTIMS invoices. If KRA disallows it, your taxable profit rises by KES 800,000 and, at 30%, you owe KES 240,000 more tax, and possibly penalties. For VAT, input VAT of KES 128,000 on the same purchases could also be refused.
What to ask suppliers for
- An eTIMS invoice for every purchase, even a small one.
- Your business PIN on the invoice, given to the supplier before they issue it.
- A description of what you bought, the date and the amount, with VAT shown if it applies.
If a supplier cannot issue an eTIMS invoice, consider whether you should keep buying from them, or whether the saving is worth the lost deduction.
How to keep your records
- File each invoice as you receive it, grouped by month. The free expense tracker with VAT records each purchase with its VAT.
- Match the invoices to your bank and M-Pesa payments; see keeping records with M-Pesa.
- VAT-registered businesses should record each invoice in the VAT input invoice register and check the eTIMS reference.
- Keep them for at least five years; see how to keep business records for KRA.
If you issue invoices
Issue an eTIMS invoice for every sale, and use credit notes, not deletions, to correct mistakes. The free eTIMS sales invoice register lists every invoice with its reference and totals the month, and the credit note with VAT template corrects an invoice properly.
What to do now
Review the last year's purchases. Find the expenses with no valid invoice and decide whether you can obtain one, and fix the process for the future. Read expenses small businesses can deduct and VAT for small businesses.
Rules and effective dates come from the Income Tax Act, the VAT Act and KRA notices. Confirm them with KRA or a registered tax agent.
Common questions
What happens to expenses without an eTIMS invoice? KRA may disallow them, which raises your taxable profit and your tax. Ask every supplier for an eTIMS invoice made out in your business name and PIN.
Does this apply to small purchases? The rules apply to business purchases generally, so keep eTIMS invoices even for modest items, and ask suppliers who cannot issue one to register.
What if my supplier is not on eTIMS? Ask them to register, or consider changing supplier for regular purchases. For one-off cases, keep the best evidence you can and take advice.