BY Josiah M.N.
*DISCLAIMER*
The notes below are adapted from the Kenyatta University, UoN
and Moi University Teaching module and the students are adviced to take keen
notice of the various legal and judicial reforms that might have been
ocassioned since the module was adapted. the laws and statutes might also have
changed or been repealed and the students are to be wary and consult the
various statutes reffered to herein
INCOME TAX
Coverage.
Whom do you tax? What is the
basis of taxation? Is it income in which case you can only tax income
earners, Is it Purchase in which case you tax everyone as in VAT?
Who is the most taxed person? Is
it the wage earner who pays 30% on his income?
Ideologies of Taxation
These are 3
1.
Ideology of the ability to pay;
2.
Ideology of the barriers and deterrents;
3.
Ideology of equity.
Ideology of ability to pay:
This ideology is based on the basis
that taxes should be apportioned or distributed in accordance with the
ability to pay and the ability to pay should be determined by income or wealth.
It should be progressive that is the theory but is it possible to be
progressive. It is not always feasible to have a progressive tax and we
do the best we can. The assumption is that income is ability to pay but
is it really? This is not always the case so this ideology is not applicable in
full, individuals are not allowed to deduct their cost of production and
this way we cannot have a progressive tax as some people have more expenditure
and are left with no income whereas others are without a lot of expenditure.
This ideology is not realistic.
Ideology of the
barriers and deterrents:
This has 3 concepts
(a)
Progressive rates diminish incentives to work; - when one is earning a
salary this really does not matter because either way you still work but for
a business person progressive tax might reduce the incentive to work again
corporate tax is not progressive and therefore this does not apply in business,
whether one earns high or low the tax is the same. But if done in
partnerships, the tax is progressive as it is deemed to be income to one and
rises in accordance to ones earning.
(b)
Progressive rates discourage incentives to invest: -
(c)
Progressive rates irreparably impair the sources of new capital -
Ideology of equity:
This is the ideology that says you
tax those in the same level and the same amount, equality among equals.
Those who earn the same amount should be similarly treated, the more you earn
the more you get taxed. Equals at income should be treated the
same. The principle is supposed to be income based, but in Kenya it is
not. VAT is an unfair tax as here there is no equality, everyone pays
the tax irrespective of how much they earn.
GENERAL INTRODUCTION
TO TAX
Tax is the only source of
self-income to governments i.e. it includes donor income. Tax is
their only guaranteed income and under their country. The richer
one is the lower ones income could be in this country. Income from business is taxed at the level of 12% corporate
tax while we tax 30% in income tax.
If the government can get people to earn more, they can lower the level of
taxation. The fundamental purpose of taxation is to raise the revenue
necessary to provide government services.
The government has all kinds of taxes
but the purpose of taxation for us is among other things to
1.
Finance public expenditure;
2.
Distribute income; - if the income is progressive, it can be distributed
by taxing those who have and giving those who do not have.
3.
It is supposed to enhance government policies one of the policies being to
encourage positive behaviour.
The government uses two rationales to
impose taxes
1.
Benefit Rationale- the government is a shopkeeper, and people pay for
the service, the government taxes and provides services security, health,
education etc. The benefit rationale cannot be achieved 100% although we
do expect at least 75% below that people ought to complain.
2.
Ability Rationale – the government taxes people on the basis of their
ability to pay. Where one gets the money, the government has no
interest. In Kenya it seems the government is only using the ability
rationale and not the benefit rationale.
Tax is compulsory; there is no tax that
is voluntary. It is a compulsory charge by the state.
Taxes can be classified in 3 categories
depending on their impact on the people
1.
Regressive
2.
Proportional
3.
Progressive
Progressive
–
where the marginal rate of the tax rises with the income then it is
progressive.
Proportional
– if different blocks are taxed at different levels. Both
progressive and proportional are equitable although progressive is more
equitable than proportional. Corporate tax is a proportional tax.
Takes the same from everyone.
Regressive
– tax increases with ones fall of income. It requires that low and
middle-income families pay a higher share of their income in taxes than upper
income families.
PRINCIPLES OF
TAXATION
Tax is governed by certain principles.
Simplicity and
efficiency are principles of taxation.
Taxpayers should be able to understand taxation. It is meant to be
governed by simplicity so that people can understand it. Taxation can be
made complex by inefficiency so simplicity and efficiency go hand in
hand. It should be clear and understandable to the taxpayer.
Cost of complying
with the tax laws should be minimal. The cost is
not very high in Kenya although it could be lower. Communication system
should be simplest to lower the cost of tax collection.
Accountability:
- the collector should be accountable to the people for the tax they have
collected. The collector should be accountable to the taxpayer. In
Kenya the government has never been accountable to the taxpayer and this is
because of the corruption. This is one of the principles that is furthest
from reality in this country. May be in future when the people are
informed on how their money is being mismanaged, then they will do something
about it.
PRINCIPLE OF
CERTAINTY:
There has to be certainty, it has to
be understood to be the same by every taxpayer and every Minister. Taxpayer
must know what they are entitled to pay. It is supposed to be extensively
and adequately publicised and every Finance Act should be publicised
in simple language, clearly visible and nothing should be hidden from the
taxpayer. Complicated tax rules make the tax system difficult for
citizens to understand. Complexity also makes it harder for governments
to monitor and enforce tax collection.
PRINCIPLE OF EQUITY:
All taxes should treat all taxpayers
the same. People in similar situations should be treated the same in
terms of rate, the amount, collection etc. The interpretation of who is a
taxpayer should be the same. They should be charged in accordance with
their economic status and their ability to pay. Being treated
equally. The terms of tax paid and the achievement from those taxes
should be equal. No one should be allowed to avoid tax while enjoying the
benefits that are being taxed for those services.
PRINCIPLE OF
NEUTRALITY:
The market economy should not be
interfered with. There should be no practical interference with the
market economy. Taxes should not interfere with market
forces. Business communities are supposed to bear minimum impact on the
spending of tax. The lower the tax the better for the business
community. In the Kenya situation our tax system interferes a lot with
the business community and is therefore not neutral. In Africa,
Botswana and South Africa may be the only countries following the principle of
neutrality. VAT is not a neutral tax because it interferes with business;
it has been likened to an expenditure tax.
TAX STRUCTURE:
The tax structure is made of individual
elements and it is only through changes of those individual elements that a
change in the level of tax can come about. Each element has a growth rate
and base and each of them is related to distinct economic variables.
Tax
Base
A tax base of a given tax is the
source of revenue and it is that source that is taxable. Every
taxation has to have a source. The basis available to any country would
set the limit for the possible tax structure. In Kenya like in many poor
countries the base of taxation is very narrow. Our structure here
is based mainly on employment and business. Production is very little and
so production tax is very low. We are traders.
The more agriculture is taxed the more
they kill it. Agriculture is our main source of income but it is very
heavily taxed. In the early stages of our development the tax structure
was in itself a reflection of a tax base. If there was no basis for
direct taxation there was more indirect taxation. Tax has now become a
reflection of a political culture i.e. taxes get amended to raise campaign
money etc.
The tax handle fee that relates the
structure to the base. The close link of tax structure to tax bases is
normal.
1.
At an advanced stage (when we become rich) the problems of revenue collections
shift from looking for tax bases to devising means of collecting and yielding
tax more effectively. Tax is not increased but concentration is on
collection. Waweru is increasing the base by sealing the loopholes of tax
evasion, he is not increasing taxes.
The income tax lays down certain rules.
(a)
Ascertainment of income – the qualifying conditions for personal allowances
rules are laid down,
(b)
The same rules decide which allowances qualify, whether singles relief,
medical, personal etc.
(c)
The rules provide for the Procedure of assessment such as self assessment –
this is one way where people can avoid tax by assessing themselves on the lower
side, avoidance is not illegal evasion is illegal. When one leaves the
procedure of assessment to the tax collector they pay more and so the rules
must provide for assessments.
(d)
The rules provide for penalties. Income tax penalties can be
demobilizing. Under the Income Tax Act the High Court and the Magistrate
courts have no original jurisdiction on tax issues, the original jurisdiction
is with the tax department and only facts of law are appealable. The tax
department has denied the courts original jurisdiction on tax matters.
In addition to being revenue device
taxation can be used for more, today we use it as a revenue device.
We use tax to encourage or discourage certain kinds of behaviour, we might tax
cigarettes more to discourage people from smoking, and taxes are also used to
distribute income. In Kenya we tax because we need the revenue.
In the long run tax can be used not only for tax collection but also for other
activities e.g. to encourage education, to encourage investments and so on.
OVERVIEW OF INCOME
TAX.
The income tax Act firstly determines
what income is; note it does not even define tax as its interest and basis and
source of tax. Out of the income, not all income is taxable.
What is taxable income?
Income:
Whose income do we tax?
What is the source of that
income? It has to be income from a specified source. In Kenya we
only tax residents. Who is a resident for purposes of income tax?
Allowable deductions, every income has
deductions so what are the allowable deductions..
Income Tax is payable by
- Individuals
- Partnerships – partners are taxed as individuals
- Corporate Bodies – flat corporate tax
- Trustees -
- Cooperative Societies – pay taxes as societies
Income tax is a direct tax.
It is direct because both its impact and incidences mainly fall on
the same person. The impact is on the person who pays the tax
to the income tax people or to the authorities while the incidence is on the
one who bears the burden. When one is an employee he is the one
who pays the income tax to the income tax person although the employer sends it
there. The burden of any direct tax falls on any person who makes that
income. Gifts are not income and therefore not taxable. Gift is
not a recognised source and is not even defined.
Income tax is generally progressive to
a certain level at least in Kenya it is up to 30%. The marginal rule increases
with the income. If one earns an income of 300,000/- or 300,000,000/- you
still pay 30%. It ought to be progressive all the way but it is not
certain that we can afford that. This progressiveness is not necessarily
good as the higher the income, the less tax one pays.
The base of our
income tax is what we call income. Income for the
purposes of our law is not clear,
Section 3 of the
Income Tax Act is the definition section but does not
define income. If there is a dispute between what is income between one
and the income tax, it would be because income tax is payable on income.
They don’t define income because sources of income keep on increasing.
The Act however defines total income – “total
income in relation to a person is the aggregate amount of his
income. Other than income exempt from tax under Part III of the
Act.”
Part III of the Act
deals with exemption of taxes. The law
imposes a tax under Part II of the Act Section 3 of the Act creates a Section Charge
of Tax and it says that “subject to and in accordance with this Act a tax to be
known as the Income Tax shall be taxed on all income of a resident…Total income
is chargeable to tax under the law if it is not exempt under Part III.
Part IV deals with
ascertainment of total income.
The law presumes that we know what
income is. It is also a legal assumption that one is supposed to know the
law is and this is an irrebutable presumption of the law.
Subject to income, income tax is income
of a person. According to Section 3 it is income of a person and it
uses the term sources of income, it does not define income. Income is
not necessarily source and therefore not necessarily taxable. Income
must be recognised as a source before it can be taxed.
INCOME
TAX
Section 3 definition – it is based on
sources of income
3 (2) Gains of profits from
business, employment, services rendered and rent or rights granted to other
persons for rent, dividends and interest, pension, annuity any amount which is
deemed to be income of a person under this Act or under any other Act.
Gains from petroleum companies and petroleum service sub-contractors.
3(2)(f) gains arising out of
disposal of depreciable assets
it is assumed that any shares can
depreciate in prices so that is why all shares are classified as depreciable
interest, so when one sells that stock, that is considered income from which
30% income tax is payable. The tax is chargeable on a person, not every
person pays income tax, there are specific persons who pay income tax they are
considered on the basis of residency not citizenship. Any income which
is earned locally or outside the country by a resident is taxable.
Therefore to be taxed one has to be a person and a resident.
Not all persons pay income tax.
All taxes are payable by individuals in
the long run.
For residents, income they earned
abroad while in Kenya is taxable.
NON-RESIDENTS
Non-residents are also liable to tax but
only for income derived in Kenya.
Diplomats are residents but they are
exempt from tax.
For the purposes of imposing tax, the
basis is residence. What is residence, who is resident?
Section 2 of Income Tax Act
– when it is applied in relation to an individual these are the categories
1.
if you have a permanent home in Kenya and you are present in Kenya for any
period of time in the year in question.
2.
If you have no permanent home in Kenya but you are present in Kenya for a period
or periods
(i)
A period amounting in aggregate to 183 days during the year of
income; or
(ii)
Present in Kenya in that year of income and in each of the two preceding
years and aggregate the number of days to 122 days in each year. E.g.
2001 = 122, 2002 = 122 and 2003 = 122
When this is applied to a body
corporate, which is not a natural person the management and control of the
affairs of that body is supposed to be exercised in Kenya in that
particular year of income.
(iii)
The body has been declared by the Minister by a notice in the Kenya Gazette to
be a resident; what if the company is not registered under the laws of Kenya
but its exercise and management are in Kenya? That is how the Minister
comes in. Local branches of non-resident firms are classified as
resident. But only for income derived in Kenya; any income derived
out of Kenya is not taxable.
A parent company that is based in Kenya
is treated as a resident for purposes of income tax and all its income derived
from Kenya and outside is taxable.
So in order to pay tax one has to be a
resident and people have raised issues at who is a resident.
In the case of Sir
George Arnautoglu V Commissioner of Income Tax
[1967] EA 312
The Appellant disputed his assessment
of his income tax in 1962 on the ground that he was not a resident in the
territory in 1962. The facts were that in 1960 he had a home in Dar-es
salaam and was there for a total of 249 days and in 1961 he sold that house but
was still present there for a total of 124 days and in 1962 he had no home but
was present for 62 days. On average he was there for 4 months in each of
the 3 years. He argued that in relation to the definition of residence,
according to Income Tax Management 1958 he argued that firstly it was not
permissible to aggregate the periods of residence with periods of mere presence
and secondly that averaging in accordance with (1) paragraph (b) (ii) of that
Act it meant in effect that four months presence was required in each of the
relevant years. The definition of residence under that Act for which the
construction depended. They said that it was permissible for purposes of
income tax 1958 to aggregate periods of residence with periods of presence.
The court went on and said that first “an individual is defined as residing in
the territory if he in fact does so.” And secondly an individual is deemed to
reside in the territory if the facts are such that he would not normally be
regarded as residing in the territory or there would be doubt as having done
so.
The deeming provisions in Income Tax
(deemed to be) according to Justice Charles Newsbold that the deeming provision
only come into play if … (it is like a presumption, you are presumed to
be) deemed to be is presumed to be, to bring the presumption into play is by
bringing the aggregate period.
BASIC CONCEPTS OF
INCOME TAX
Income Tax will be on income only, it
is not on assets
The only income which is provided that
is taxable is that income which is from sources that are taxable,
the income has to come from a classified source, there is no simple and
comprehensible definition of income tax but it may be put in 3 broad categories
1.
Income from personal services that are rendered by one person to another;
contractual service generally, as long as it earns money it is income
and the assumption is that the services have to be legal;
2.
Income from property this is income, which generally when one sells
property, one pays various types of tax but when the seller receives the money
when declaring income at the end of the year, the proceeds from property must
be declared.
3.
Income from profits of a trade, profession or vocation.
Income tax is different from capital
but for purposes only of paying tax but it is not always easy to distinguish
between capital and income, if you cannot classify any receipt as income, it
is generally classified as capital. Patent Rights in England is
charged under income tax, it is capital until one sells it, then it becomes
capital.
The only law that operates
retrospectively is
The basic approach is that capital
is considered as the tree while income is the fruit.
Liability to Income
Tax arises out of
1.
An assessment, to be liable there has to be an assessment as a notice to one as
a taxpayer that there is a tax that is due from one. There can be a
self-assessment or the assessment, which is done by the income tax.
Basically all of us except for employment which is assessed in advance, the
rest is basically self-assessment as in when one files returns they are
assessing themselves. Where the CIT disagrees he can do his own
assessment.
2.
Amended assessment provided by the Commissioner of yourself
3.
Instalment assessment is only applicable to corporate tax not individual tax.
4.
Deduction: once you are assessed you will be deducted and the deduction
is from the receipt you have already received, e.g. an employee’s PAYE is
deduction. Every employer is termed as an agent of the commissioner for
purposes of deducting the taxes.
Income tax is basically one tax and
this was declared in 1901 by Lord Macnaghten in the case of
The London County
Council V. Attorney General
(1901) AC 26
at 36
he defined income tax as “Income
Tax if I may say so is a tax on income, it is not meant to be a tax on
anything else. It is one tax not a collection of taxes in every
case the tax is a tax on income whatever may be the standard by which the
income is measured.” It means it does not matter how you measure
income but it has to be income and if it is not classified as income
then one cannot pay income tax on it. Profit is basically income
for purposes of tax, the gross turnover is not income for purposes
of tax but once you get your net income, it is income for purposes of tax.
In Kenya it is an annual tax. It is not possible to make an
assessment in the current year, as one has to wait until the year is over and
then audit their accounts. Although the returns are filed the
following year, we still call it current year of income. It is based
on the source from which it comes.
One can reduce their tax as a payer
either legally by an allowance or by a tax relief or by an exemption
like the church gets. Or one can actually avoid tax.
Tax avoidance involves one of the
following things:
1.
One can claim that certain receipts do not constitute income;
2.
Arguing that you were not resident in that year of income;
3.
You can claim that you have deductible costs, when they agree, you
increase the costs;
4.
Increase the number of personal reliefs that one is claiming, if they
are accepted the tax is reduced
5.
Transfer income to another person, you for example transfer income to
your spouse who earns less and thereby reducing the tax burden.
6.
Transfer deductions from one year to the other year,
All these are ways of tax avoidance,
which is not illegal, if not genuine one may pay penalties but it is not
illegal.
The difficulty of assessing any one
individual income is also very difficult in developing countries, even fixing
rates in countries where people are already overtaxed is difficult.
Tax falls under income which excludes
by general rule gains and losses, losses only for purposes of business not
for purposes of employment and it is expected to be progressive until it
reaches a certain level except corporate tax where all are taxed at the same
rate. Tax falling on income is what is called a definitive principle,
when we say progressive that will be the equitable principle, the one upon whom
the income falls is not equitable.
The second principle is based on
a current social consideration of justice. Corporate tax do not
have this principle as they all pay a fixed amount but we assume that since
everyone pays a fixed amount there is no progression but lets remember
corporates pay dividends to individuals that are tax and are progressive.
The progression ends at 30% where after everyone pays the same amount.
People have a heavier burden to carry
when it comes to income tax if they are rich. The first aspect is the
ability to arrange the income tax arrangement. You pay a professional to
arrange them in such a way that you pay the least, sometimes you pay only on
your ability to arrange, when you have a better arrangement to arrange tax, you
pay less although your income could be the same as with someone who earns the
same.
INTERNATIONAL ASPECTS
OF INCOME TAX
1.
Competitiveness
International competition in business
does pressurize our policy makers in the way they organise their tax
systems. We grant tax rebates, give exemptions so that we are able to
compete in the international market because taxes are an expense.
Both direct and indirect taxes are used. The Export
Processing Zone is a good example where tax exemptions are offered to encourage
exports.
2.
Reliability
The taxation and revenue should be
reliable. Rules should be reliable and adequate. Income tax or
taxation in general is the State diet without which the State would
starve. It is vital to the economy and therefore the flow should be
reliable, we should be able to know when it flows and how it flows and how much
of it is there since we rely on it for services. Government expenditure
ought to be anticipated so that we can hinge our tax assessment on the
anticipation.
3.
Interpretation
When we interpret law, the
interpretation is required to be very strict. Where there are two
interpretations, we take the interpretation that is most favourable to
the taxpayer. You can only go to court on a question of law or on a
question of mixed facts and law, on a question of fact you cannot
go. In the case of T M Bell V Commissioner of Income
Tax (1960) EA 224
Income Tax V Holdings
Limited
(1972) EA 128
The general rule is
that a taxpayers business or other ventures are considered together as one
(your income is your income does not matter from what source) chargeable
income should be arrived at by aggregating all the taxpayers income and then
deducting all expenditure incurred from the production of this income.
In interpreting the Section (58) or any
section the whole Act must be considered in relation to the
particular section and especially with reference to the interpretation section and
the methods set out in the Act in this case our Income Tax Act Cap 470 to
arrive at what is chargeable income. One must consider the provisions of
the Act and if the Act provides on what to consider as chargeable income, then
you consider that if not, you look elsewhere. It does not matter how
harsh the Act is, it must be followed. This is the theory, assuming that
the taxpayer goes to court. The theory is that the law is pro-taxpayer
but in reality, the law is pro commissioner of income tax.
ADMINISTRATION AND
JUDICIAL ORGANIZATION OF INCOME TAX
TAX LAW LECTURE 4
JUDICIAL ADMINISTRATION OF TAX
Income Tax Collection falls in two
levels
1.
Administrative level or main level where the bulk of the calculation is done
2.
Judicial Level wherever there is a dispute one is supposed to go to court
Administration aspect falls into 3
categories
1.
General Administrative Management. They have to establish who
ought to pay income tax and where they are. There is a legal
definition of who is supposed to pay tax i.e. who falls within that definition;
they also trace to find out where the taxpayers are. Where are the
taxpayers? Administratively the tax collectors are supposed to establish
where the taxpayers are.
2.
Ascertaining the amount payable by each taxpayer by assessing the
income.
3.
Collecting Data – they have assessed, ascertained how much then they go
ahead and collect it.
Judicial Elements are brought about by
the above 3 administrative elements where disputes arise whether one is a
taxpayer, whether what is being taxed is income and the amount to be collected.
The revenue department falls
Assessing and collecting taxes is what
brings most arguments, it is the most complex because we have very few tax
collectors.
TAX ASSESSORS
The Assessors are the people who
identify one as a taxpayer and then proceed to send one their tax returns so
that they can file tax. The returns are sent to the taxpayer to show
that they have paid tax and also if there is any extra income that has not been
paid for under the PAYE then one has to pay for it. Normally the
assessors do no assess businesses and they will request that they be told what
one has done, only after which they will do their own assessment.
Secondly they receive the returns and then they assess the amount of tax due to
one in accordance with the returns. It is the assessors who receive the
appeals where there are appeals (referred to as objections) and deal with them
and they are the ones who produce the Commissioner’s case to the committee and
also to the courts.
TAX COLLECTOR
Done by tax collector. They
receive the money that comes in and follow-up the defaulters. In the
process of doing this they issue one with notices and charge penalties and
interests for non-payment. They issue receipts for all the monies paid,
if you have overpaid, they issue a credit note or a cheque.
JUDICIAL PART
Anywhere there is a dispute that went
beyond the tribunal and went to court, it becomes official. It is not a
criminal matter unless it is a matter of tax evasion but disputing is not an
offence.
SOURCES OF TAX LAW IN
KENYA
Tax law in Kenya is all based on
statutes, it’s all statutory, and not just income tax but every tax is provided
for by statutes. Wherever there is a dispute, then the courts come in to
interpret the statute. The courts interpret the statutes but do not
establish the taxes themselves. It is to be found in our law in Cap
470 Income Tax Act. There is no general power to delegated legislations
to create any taxes. They show how exemptions are created.
There are certain areas where the law
will grant the minister some powers to deal with the income tax Sec. 41
deals with Double Taxation. Where the Act imposes tax to exempt one
by way of double taxation he can only do this under the power granted by the
financed
Income tax is imposed each year
although once it gets here it is permanent. We have provisional Acts that
are created to increase rates. Section 3 of the Income Tax – Imposition
of Tax (1) Income Tax from businesses, exemption falls under Part III of the
Act which starts with Section 17, then we go to collection and
objections. Local committees and tribunals do not have judicial binding
decisions although they are followed.
OBJECTIIONS & APPEALS
PART X of the Income Tax Act -
Objections and appeals are provided for
in Section 82. The committees and tribunals appointed by the Minister hear
the objections and their decisions are not final but their findings on facts
are final. The decision of a court of law on a point of law
is binding and final and no one can argue against it, neither one or the
commissioner can argue against it even if it is wrong unless one seeks a
review.
Interpreting tax law certain principles
are used. These are principles established by English courts, which we
have been following and our law is based on them
1.
The onus or burden of proof is on the State to prove that there is a valid tax
law which imposes the tax and that that law covers the taxpayer in question; to
quote Pennyquick in the case of
Reed and
International Ltd V CIR [1974]
1 All ER 385, 390
he said duty is chargeable on any
particular subject matter or if that subject matter falls within the words of
that statute.
2.
The taxing statute must be construed or interpreted strictly by reference to
its actual words. This has a lot of case law and one of the earliest case
is
Partington
V Attorney General
(1869)
L.R. 4 H L 100, 122
he said “if the person sought to
be taxed comes within the letter of the law he must be taxed however great the
hardship but appear to the judicial mind. However apparently within the
spirit of the law the case might appear to be … a construction is not
admissible in a taxing statute…” there is no question of equitableness.
It looks strictly at the letter and does not care about being
inequitable. In the case of
Cape Brandy Syndicate V IRC
[1921] 1
K.B. 64 71
Rowlett J. said “.. In a taxing
Act one has to look merely at what is clearly said. There is no room for
any internment, there is no equity about tax, there is no presumption as to a
tax, nothing is to be read in, nothing is to be implied, one can only look
fairly at the language imposed.” Courts have been looking at Substance
rather than form. Looking at form requires a literal translation
while looking at substance …it is more likely that if there is an ambiguity in
any section that carries weight against the taxpayer, that ambiguity will be
used in favour of the taxpayer or the ambiguity will be removed in favour of
the taxpayer. The court has to give a clear meaning to the ambiguity
however unreasonable it is. It is not for the court to clear the
ambiguity.
3.
The Object of the construction of a statute is to establish the will of
parliament and so it should be presumed that neither injustice nor absurdity
was intended. If interpretation will produce absurdity or injustice and the
language admits such an interpretation, which would avoid it, then such an
interpretation may be adopted. This means that the language of parliament
has not excluded that kind of interpretation.
4.
The history of an enactment like the Income Tax and the reasons that led to its
being passed may be used as an aid to its construction. So one can look at the
history of the Act to see why it was enacted and use that to interpret
it. Mangin V IRC [1971] AC 73
CH 746 Lord Donovan said “…
PRINCIPLE OF
RETROSPECTIVITY
The law can be retrospective in various
ways
1.
It may impose a tax on income that was acquired before the law; this type of
retrospectivity has been enforced but it has been classified as “improper and
immoral” nobody said that the law should be proper or moral and in tax
law, it can be done. Income tax, your income can precede that law unless
in the case of Kenya if the matter ever comes to court, it’s a law that needs
to be changed. If the Constitution says it cannot do that then it would
be unconstitutional but at the constitution declares that parliament can make
any law.
James V I.R.C
[1977] STC 240
The
taxpayer (James) challenged the validity of Section 8 of the Finance Act of
1974 it increased the rate of surcharge Retrospectively for the year of
assessment 1972-73, the taxpayer was saying that the Crown had set that rate
and in some cases had even collected the Tax, it was therefore contrary to
common law and natural justice for that rate to be subsequently valid as it
amount to reopening the transaction. Slade J dismissed the Case.
Although he sympathised with it and he actually described that Section as
retrospective legislation of extreme kind which would operate harshly on
taxpayers. However he did not agree that it was illegal and this is what
he said “…it is in my judgment that as the constitutional law of England
stands today parliamentarians have the power to enact by-statute any fiscal law
whether of a prospective or a retrospective nature and whether or not it may be
thought by some persons to cause injustice to individual citizens and note.. If
the wording of the legislation is clear the court must give effect to it even
though it may have or will have a retrospective effect. It has no power
to refuse to give effect to it on the ground that the protection private
citizen required.” In the case of
Ingle V Farrand
[1927]11 TC 446
Where they were interpreting whether it
was public office or employment in the case of Great Western Rly & Co. also
and later parliament passed a law which changed that interpretation
retrospectively. There was nothing they could do and the courts
went ahead and enforced it.
A statute can change provisions that
may have been announced in a provisional collection of taxes Act. Our Act
is Cap 495 and the Finance Act when it comes can change that, this is changing
the law retrospectively and the things is our law allows that assessment be
made can be changed by the Finance Act that is Section 2 which says that in
relation to any year of income in respect …. Under the provision
collection of taxes and duties Act.. Cap 470 can change any assessment set
out in the provisional, this is legal retrospective.
A retrospection may be introduced to
reverse a decision of a court i.e. an Act may be changed retrospectively to
reverse the decision of a court. An example cited in England is Section
62 of the Finance Act 1987 was introduced to reverse the case of the decision
of Padmore V I.R.C. S [1987] STC 36.
Law can be introduced retrospectively
to clarify an old law or some confusion in a past law.
When it comes to interpretation of
taxation, the consequence of a transaction one either uses form or substances
but there are questions to be asked i.e. is the law being interpreted relating
to a specified transaction or literally or using the rationale rule of
interpretation. Do you try and read the intention of Parliament in the
words, the style or form. If you use the style it means you don’t.
Refer to the case of I.R.C. V Westminster (1936)
C 1 - he was trying to create a trust for his employees
for future payments and the question was if those people had asked for the
money that he had created a trust for, could he have been taxed that amount?
Was it an income or future income? It was contentious issues and
according to the law they were saying no, that the law should have been
interpreted using the substance doctrine and.. The special commissioners
at that time held that they were wages and therefore taxable. This
decision was accepted by Finley J. in the High Court who said that looking at
the substance and not the form it must be regarded as the case of someone
remaining in the Duke’s employ and therefore wages. The Court of Appeal
reversed the decision and the House of Lord held that the C.A. was right.
The document said that they were created for trust saving for after service and
that is what they were, they were not wages, look at the substances. The
House of Lord said Lord Atkin dissented “… I do not myself see any difficulty
in view taken by the Commissioner and Finley J. that the substance of the
transaction was that which was being paid was remuneration so construed the
correct interpretation appears to be that they were wages but the other members
of the House of Lords overruled him saying that they could not accept the
substance approach.
C J CLARK LIMITED V
IRC
[1973] 50 T.C 103
This case was talking about “…
when parliament sweeps away one provision in amending act enacts in its place
another provision which is drafted rather differently … he who says yes and
later changes his mind and says no does not demonstrate for him yes means
no. One is allowed to use a rational interpretation rather than a
literal interpretation.
Consolidation Act – Finance Act, which
comes out every year
Lord Diplock – the only mischief a
consolidate is supposed to remove is a peace-meal Act. In the case of IRC
V Joinder [1975] 50 TC 449
Any Act consolidating any law are not
to be interpreted differently it is the original Act that matters, the
consolidated Act.
PRINCIPLES OF STATUTORY CONSTRUCTION
The Ramsay Principle
– it is important to interpret how far it is permissible when one comes to the
Act they have to look at the substance of the Act as opposed to the
Form.
In 1936 the House of Lords held that the
Inland Revenue Authority could not invoke the supposed doctrine of
substance in income tax. According to them you interpret it
formally. They said that one could not invoke the substantive
doctrine of interpretation so as to uphold the legal rights and interests of
the parties. The legal rights of the taxpayer are to pay in
accordance with the income tax law. They went on to say that the
only situation in which a document could be disregarded for tax purposes was to
find out whether or not it was bona fide or intended to be acted upon. They
said “any attempt to pray aid in the so called doctrine of substance was
merely an attempt to make a man pay tax not withstanding that he has so ordered
his affairs that the amount of tax sought from him is not legally claimable.
They are saying that if you have filed your returns correctly, and you have not
cheated but the way they are organised has resulted in the lowest profit, they
are saying that using this doctrine, one would pay more than he is legally
entitled to pay.” How one uses information may make a big
difference.
In our case Section 110 of the
Income Tax Act – incorrect returns “ a person shall be guilty of an
offence if he without reasonable cause makes an incorrect statement in a
return of income by omitting or.. It makes it a criminal offence to file
an incorrect return. If you tailor it in such a way that you
save money, this is not an offence. What is wrong
information? As far as income tax is concerned, one looks at
form and not substance.
In the case of the
Duke of Westminster
it was held that every man is entitled
if he can to order his affairs so that the tax attaching under the appropriate
Acts is less than it would otherwise be. If he succeeds then, however
unappreciative the commissioner of Inland Revenue or his taxpayers may be of
his ingenuity, he cannot be compelled to pay an increased tax. Lord
Tomley
The subject cannot be
taxed by inference but only by strict interpretation of the law.
This doctrine was looked at in the case of
Ramson V Higgs
[1974] 50
TC
and then it went on to become
what we live on today which is the Ramsay Principle.
W
T Ramsay Ltd V IRC
[1981]
54 TC 101
RAMSAY
PRINCIPLE
1.
The principle is a principle of construction for words involved in taxes and
2.
Secondly tax avoidance par se does not bring the Ramsay Principle into play.
It is not part of the judicial function to nullify any step that one as a
taxpayer chooses to organize their tax affairs although they are supposed to
modify the Westminster principle. One can organize their matters so that
they can avoid tax and it is not for the courts to go behind ones style to
prove that one is avoiding tax unless there is a specific provision avoiding
tax avoidance.
3.
Thirdly a tax avoidance motive of a prior transaction does not enable it to be
treated as one with a subsequent transaction i.e. tax avoidance is not an
authority; one has to look at the current transaction independent of the
previous transaction.
4.
Fourthly, they say that there is no moral dimension to the Ramsay Principle
i.e. they don’t do it for moral purposes. According to them any
idea that the principle in Ramsay is a moral principle or that it is supposed
to catch tax avoiders is wrong and it is defeated by the interpretation
that there are, Ramsay Principle is a principle of statutory construction
and not a moral principle.
5.
Fifthly the principle is only concerned with ascertaining what is the
reality of the transaction
6.
The Ramsay Principle is not a substance doctrine; and it’s a formal
interpretation
7.
The basic approach where Ramsay applies was that it is not that the court
looks at the behind returns but the returns were not properly done.
They did not prepare a proper return.
PRINCIPLES OF
STATUTORY INTERPRETATION
Principles of tax statutes
interpretation. As set out in the case of Ramsay
- A subject or taxpayer should only be taxed on clear words of the statute not in accordance with any intendment or intention;
- A taxpayer is entitled to organize his returns in such a manner that he reduces his liability to tax as much as possible.
- It is for the fact finding commissioners to find whether the document is genuine or not, if it is genuine they argue with it and if they find that it is a sham, that is the information they bring to court. The court can go behind the document to determine whether the document is a forgery or not. The justification of a court will only be to look behind that document only if the commissioner raises the point
- Given that a document is genuine the court will not go behind it to look at underlying substance.
JURISDICTION OF OUR
LAW
Parliament in Kenya has jurisdiction to
make law. Income Tax Act applies to all Kenya including Kenya’s
continental shelf. Outside Kenyan territory by exclusion one is not
bound.
On the 1st January 1974 the
East Africa Tax became the Kenya Income Tax Act Cap 470. It is only
effected to persons who are found within its jurisdiction in accordance with
its definition. Its definition includes some elements of Kenyan residence
not Kenyan citizenship. It creates territorial limits, which are
- Person to be taxed is either resident or non-resident
- Income to be taxed – the income that should be derived from all accrued to one in Kenya
- It is annual
Section 3 tells us how income tax is
effected, annual, upon income of a person, whether resident or not that accrues
to or is derived in Kenya. The type of tax, the period, the geography and
the source.
The person who is to be taxed is not
determined either by residence or anything but by income, without income,
income tax has no interest in one. The income chargeable is provided for
under Section 3(2) of the Income Tax Act. Any income that does not fall
under that section is not income for the purposes of this Act. The person
to be taxed is defined under Section 3(1).
What type of tax in
subsection 2, is it gains or profits from business?
From whatever period of time as far as business is concerned. From
dividends or interests, from a pension? Definition in 3(2) a
person does not include a partnership.
Section 10
gives details of what type of income, details of what gains and profits are.
What is a year of tax – 12 months from
1st January to 31st December …
A foreigner has to be in Kenya for 183
days in a year or for an average of 122 days for 3 years.
Who is a residence, can one be a
resident if they have not been in Kenya for several years, according to English
Law, yes one can, you can be held to be a resident although physically absent.
In the case of
Rogers V. IRC
(1879) 1 ITC 225
–
Mr Rogers went out of the UK for a whole year. He was a commander of a
ship and left his wife and children in England. The income tax people
wanted him and he argued that he was not a resident and therefore not liable to
tax and the court said no that he was a resident not on the basis of a wife but
“… every sailor has a residence on land” it is a presumption which is
correct. His evidence was his wife and children. They used the
substantive principle and reversed their own principle of using only formal
interpretation; to be resident you have to be there physically or legally
declared to be resident.
In Kenyan practice the average period
spent counts to be a resident, a visit to Kenya and a permanent home
counts. If you don’t have a permanent home and you make a visit, you have
to have stayed for a 183 days. Rogers had a permanent home in England but
had not visited.
The purpose of the visit is immaterial
Section 3. If the income is derived in Kenya the purpose of the visit if
immaterial. Section 5 will require that income (1)(a) – an amount
paid to a person who is or was at the time paid the amount for services
rendered …
It is not where you
are paid but where you are. (2) Gains of profit – includes
all that a, b, c, d, e, f. One can make a permanent visit here but
the work is not being done here.
I R C V.
Zorah
(1926) 11
TC 289
Zorah was a retired British worker
(member of Indian Civil Services) who visited the UK for 6 months with the sole
object of seeing friends. The Commissioner tried to tax him, the matter
went to court and he was held not to be a resident in the UK for the purposes
of Income Tax..
Where one is resident in Kenya but not
of his own free will, he will still be held as resident.
In the case of
IRC V Lysaght
(1928) AC 234
Lord Buck master stated “I
understand the judgment of the Court of Appeal to mean this that they regard
the objects of his visits to show that he could not be regarded as a
resident. They said that it was not of his own free choice but in
obedience to the necessities of his position in relation to the company that he
was over there. The CA considered that as very important, the fact
that he was not there. A man might well be compelled to reside here,
completely against his will. The exigencies of business often forbid the
choice of residence. He went on to argue that a man may have his home
somewhere else and stay in England because business compelled him. But
according to the House of Lords the periods of which and the conditions
under which he stays are such as may be regarded as constituting residence and
so he was a resident. The court went to the formal interpretation.
When it comes to the
interest of the taxpayer, courts have no other business but looking at the
substance but when it comes to looking at the interests of the commissioner to
look at it formally.
Permanent home is not defined in the
Act. We go by English decisions of ownership of accommodation. You
don’t have to own any accommodation in Kenya going by authorities in order to
own a home. For purposes of income tax all that is necessary is that an
individual has access to the property whenever he/she wishes, it does not have
to be permanent.
This was decided in the case of
Lowenstein
V de Salis
(1926) 10
TC 424
This man was Belgian and used to visit
the UK every year where he stayed no more than six months and he stayed in a
hunting box and that box belonged to a company where he was a director. Not
only was he a director in this company but owned 90% of the shares so he had a
place to stay in England, it was old. The court here looked at
substance although we are told that substance is not applicable in income tax,
the court held that the hunting box was available de facto to him whenever he
came to the UK although he was neither the owner or the lessee but he had
access to it whenever he wanted to and for that reason he was resident in
England because he had a permanent home. The commissioners in England
came to a conclusion that where a person residence turns on whether or not he
has accommodation, for this purpose, ownership is immaterial. The
opposite is also true that if you have a house, which you own but you have
leased it out but have no access to it, then you have no home. They
seem to be extending the definition of ownership. In addition the English
if one has a spouse who lives some where, where she lives will be considered
to be available by the Act unless of course you are separated but when you are
still husband and wife whether it is owned by the wife, you still have access,
a partner’s home is his/her home. We talk of permanence because in
Kenya if you have a permanent home, you don’t have to be here for 183 days you
just have to be here and it is enough, you are entitled to pay tax.
In England they have a rule that we
have not provided i.e. if the place being rented is being rented for 2 years
and it has furnished accommodation or less than one year but unfurnished
accommodation then it is permanent.
INCOME FROM
EMPLOYMENT
Income from
employment;
We are studying income tax for the
natural and artificial person.
A natural person can
be employed but an artificial person cannot be employed and thus a natural
person’s income comes from employment and artificial persons income comes from
business.
The business a natural person does
would always be individual business unless it is a partnership and unless it is
a company.
An income from office can be from an
individual or income from employment.
The history goes back to 1918 when
Public offices and employment were charged and income tax law does not define
its terminology it leaves it open so that everyone could fit in.
1922 they transferred employment
charges from schedule D to E.
However it does not matter under which
schedule you are charged
1956 Act charged income from all
employment in schedule E and our law today charges from sources of income under
part II of the Act, and this is a very important part because it affects
you and imposes taxes on all incomes.
Part – II is actually called imposition
of tax and they base it on all income the most famous section 2(1)
Income tax does not know citizenship
whether you are an Australian you can be liable to Kenyan income tax.
Income tax is
chargeable on an annual basis and it is taxed separately independently, and it
is upon income it is not from anything else. But if you look at
the section of the Act there is no definition of income and yet that is what
you pay tax on.
You are required to
pay tax as a resident and not as a Kenyan.
Section 3 (2);
What is income?
They don’t tell you but they tell you “
income upon which tax is chargeable” subsection 2 says, “gains and profits from
the following:
a) Business
for whatever period of time carried” even if you carry business for half a day
in a year you will be taxed on it;
b) Income
from employment or services rendered;
c) A
right granted for another person for use or occupation of a property (this is
for the landlords and the right they are taking for granted to another person
is meant a tenant” if it is ex gracia then there is no income
d) The
second item they classify is dividends and interest
e) A
pension charged or annuity
f)
An amount deemed to be an income of a person under this Act
g) Any
gains accruing in the circumstances and ...in the 8th Schedule;
h) For
the purposes of this section person does not include a partnership (so that
they tax you as a person on gain from your partnership and then they charge you
as a partnership being a company)
When they say annual income that
does not mean that you have to work for a year, what it means is that income
for whatever periods in a year.
From the income of employment they
charge you under section 5 you look at part – II, again you assume that it is
well defined. This section has A and B
Two things have to be address:
1) Whether
you are taxable and
2) To
what extent you are taxable
You may even be exempt from paying tax
on a particular transaction such as Ndwiga.
When you are exempt from tax there are
times when you as individual may be exempt from tax including even customs say
when you an Ambassador, even if you are a resident in Kenya but your income
does not come from Kenya. However if you are to buy from Uchumi you are not
exempt even if you an Ambassador if you want tax free items you have to go to a
duty free shop, but if you are a Kenyan then you will be given an identity to
buy from a duty free shop.
In order to decide whether you are a
taxpayer you have to look at the following:
1) Do
you hold an office or employment;
2) Is
that income from that office taxable
3) You
have to look whether that taxable income falls within any income provisions;
4) What
deduction you have to make (you are not the one making a deduction that is why
you are asked to file returns and you tell them that this is what I have earned
and this is my tax)
5) Then
you have to look at section 5 and that is what charges you.
Under Part – II – imposition of tax
subject to Income Tax Act income refers to gains and profits from employment or
services rendered. However there is no definition in the Act for the term
employment and even in England there was no statutory definition of the term
office. But you get some definition in cases. Look at the case of
Great
Western Railway Co v. Bater
(1920) 8 TC @231
Rowlatt J SAID:
“ That definition is something which is
a subsisting permanent substantive position, which had an existence independent
of the person who filled it, and which went on and was filled in succession by
successive holders” This is the definition of the term office by Rowlatt.
However Gachuki does not agree that the
office has to be permanent, but he does agree that it has to be independent
of the person who is occupying it even if you retire, die or fall sick the
position remains.
This definition went on until it was
looked upon in the case of Edward v. Clinch
(1981) 56 TC @367
In this case where a person was
regularly appointed to act as an inspector of public inquiries. This was an
office created by a statute but it was not a permanent job only when it was
necessary.
When he was appointed the issue arose
whether that office was an office within Schedule E subject to income tax.
The House of Lords decided that it is
open to the courts and it is also right for the courts to consider the Rowlett
definition (because this was not a dictionary definition).
According to them it was still
appropriate and that they could continue using the term office under Schedule
and Rowlett definition was correct except that rigid requirement of permanence
cannot be accepted. And when it comes to question of continuity it does not
exist even they went on to say that the terms trade or vocation they are the
same as employment and office.
Although in Kenya the most used term is
employment.
According to their view the continuity
is not necessarily permanent and it has to be independent of the employee so
that any person appointed to that position may leave it and the position still
remains the same.
In their case every appointment had to
be personal to a taxpayer for the purposes of tax, it has to have an
independent existence and has to be continuous.
If you look at these provisions and
then you look at the office say the Office of the Vice – Chancellor, you will
see that the office is continuous but should the University of Nairobi cease to
exist the continuousness ends and the statutes provides for it and there will
be no Vice – Chancellor of the University of Nairobi however, Makogha as a
person will still exist.
If I sit in Makhogha’s office and I
earn twice as much I will pay more tax than Makhoga paid because the tax is
personal to me and even if I am exempt from tax I will not pay tax because the
tax is personal to me notwithstanding that Makhoga did pay tax sitting in that
office based on his employment.
The term employment is more extensive
than the term office because every office including casuals are employed and
they don’t hold office however they are employed – this is as per Gachuki.
Employment can exist where there is no
office – such car wash on the street, however in that case the judges decided
differently.
The leading case in this is
Davies
v. Braithwaite
(1931)
18 TC @109
The facts of the case there was an
actress, she contended that one of her separate theatrical clearances was.. And
each separate appearance was a contract of employment and thus should be taxed
as income from employment (perhaps tax from business was higher than it is
today).
But Rowlett rejected this argument
saying that
“When the legislator used the term
employment in Schedule D and then shifted it to Schedule E, alongside offices
the legislature had in mind employments which were something like offices. And
I thought of the expression posts. He moved on to say that as far as he was
concerned where there was any method of earning you earn of livelihood from a
method and its not from a post (as you find in an office) and it is a
series of engagement. Then it means that moving from one engagement to
another should not be considered as employment”.
In employment the Schedule was thought
to be something like office - they were similar and schedule E was where they
were charging employment and Schedule D
The term employment was in Schedule E
together with term office
Two factors can be taken into account
when you determine whether you are employed or you are carrying out a business:
1) Whether
or not the services are those of a professional and that is what you refer to
as vocational services;
2) You
look at whether there are a number of different engagements that that person
has undertaken over a period of time;
3)
However
there are no conclusive decisions and this was decided in the case of
I.R.C. V. Brander and
Cruinkshank
( 1971) 46 TC @574
This was a firm of advocates and
carried on legal services and at the same time they acted as registrars to a
client and they would register a company occasionally.
They did two cases and they charged 2,
500 Pounds. The Commissioner argued that that money that they received was
income to their firm or profession or business.
The House of Lords rejected saying that
that was more of an office than the profession. And according to
them they were saying that where you have a selected or an appointed person
appointed to a position where he has to perform some type of work rather than
where you have a category of a person who is appointed to carry out a particular
task which is a profession and that is business. According to them one of the
jobs is not employment. In Kenya there are professional servers instead of
keeping a court clerk they offer services of a court clerk to perform service
but they are not employed by anybody. However, there are certain services that
can only be performed by professionals, those services are performed for the
hospital to the patients
In tax law courts are very resistant to
taxation.
Look at the case of
Market Investigations
Ltd v. Minister of Social Services
(1969) Vol II, QB,
@`73
Where the court rules:
“The fundamental test to be applied in
distinguishing between a contract of service and a contract for services is
this person who has engaged himself to perform these services performing them
as a person in business on his own account? If the answer is yes then it is a
contract for services. If the answer is no then it is contract of service. And
the court tells you to have regard to the following things:
1) The
terms of services and if you find that those terms allow that person to
exercise control of the work carried out and the manner in which it is carried
out then it will be a contract for services because it is business.
2) But
if the control of the work carried out and the manner in which the work is
carried out is by the person who is recipient of services then it is a contract
of service.”
Part timers in Gachuki’s view are
providers of professional services generally.
Fuge V. Mc
Claelland
(1956)VOL
36 TC 1
Taxpayer was married and his wife was a
full time teacher during the day then she agreed to teach the evening classes
and the pay for the evening classes was under a different contract. The
question was whether the pay for the evening classes income from employment or
a business. If it s income from employment then the husband will pay or whether
it is a business and then he will not have to pay.
For the some reason court said that it
was income from employment.
Tax from Employment:
Lindsay V
IRC
[1964] TR
167 –
There was a man who held a fulltime
post as a radiologist in a certain hospital. At the same time he
delivered lectures in the same hospital not as a radiologist but as a different
kind of job. The Income Tax argument was that the fee he received, as a
teacher was taxable although according to our Income Tax Act it is any income
received from employment or for services rendered so we can consider this as
services rendered. The court held that this income was taxable as
the argument was that it was not part and parcel of his employment income.
Walls v
Sinnet
(1987) STC
236 –
A taxpayer who was an employee worked
for 4 days per week for a college. The college was owned and ran by a
local authority. He worked for them and they did not control him at
all. The local authority did not exercise control over the way he carried
out his duties at the college. The argument was since the so called employer
did not exercise any control over this employee, then his income was not
taxable as income under Schedule E in England and in Kenya Section 3 …
The commissioners ruled in the first
place that it was taxable, then he went to the local commission and appealed
and the commissioners decided that it was not employment, it was schedule D,
then the matter went to court and overturned the decision saying that although
no control was exercised over him on how he performed and he had income from
other sources during that time, it was still taxable. So the rule is and
it has been adopted here in Kenya, that one has to bring any other source of
income plus the employment income so it can be taxed together as employee
income. The argument is that although nobody exercises control it is tax
as income from employment.
One can be held to be employed full
time and at the same time carrying a professional job, it does not
Matter. This was decided in the case of
Mitchell Edon v Ross
(1962) 40TC56
The taxpayer was in private practice
and also held a job on which he was paid a salary under the National Health
Scheme. His argument was that his private practice would not have been
successful without his employment and therefore his employment should be
treated as part of his profession. He wanted his income treated as
business income, rather than employment income. He argued that it should
be included under Schedule D but the Court refused to do that. Whether
income is from employment or from professional may not be learnt easily.
One has to bear certain considerations like firstly, does the taxpayer occupy
an office, and the next to consider is “do you undertake any employment under
that office, Do you merely render services in the course of the exercise or
practice of his profession, or the office he occupies or does he only render
services in the course of the private profession.
Income tax is taxable on a current year
basis and that is how it is assessed so that the taxpayer in any year of
assessment will be charged all the income for that year in relation to
employment or services rendered.
Section 3 (2) (a) (i) Subject to this
Act income which is chargeable under this Act … Section defines an
employer as including any resident persons responsible for … employee is
not defined neither is the definition of employment.
Heaton v
Bell
[1969]
L46TC 211 –
The court in this case defined
liability to tax of a taxpayer “it is well settled that a taxpayer
or tax or liability ….
The meaning is that one is taxed on
their earnings and not on net received. Income to be earned is not
taxable. Even where one gives part of their earnings to charity, they are
taxed on their taxed earnings.
Section 5(2) Gains or Profits
from employment or services rendered for purposes of section 3 (a) (ii) gains
or profits include wages, salary, leaves paid, payment in lieu on leave, fees,
commission, gratuity or allowances.
Section 15 disallows donations
exemptions donations are not allowed as a deduction
Section 16 – donations are expressly
disallowable since they are personal and the decision is the employee’s.
Section 5 – 3 methods under which
amounts payable by virtue of contracts being terminated. Where there is a
contract that defined what is to happen in case of breach, where there is no
contract and where there is no provision at all depending on these 3
situations, taxation of income arising out of the time a contract has ended
that that amount is taxed.
In our case all income is taxed under
Section 3(2) (a) (ii) – profits from employment including pension, which is
earned as income. For it to be termed as tax it must be derived from that
office or employment, if it is income from a harambee for example, it is not
earnings and therefore does not fall anywhere and is thus not taxable.
The general principle was provided for
in the case of
Hochstrasser
v Mayes
(1959) 38
TC 673
IN
this case Upjohn J. decided and gave the authorities and
summarised them saying they seemed to have answered the question that in the
light of every particular fact, every case whether or not particular payments are
made or is not from employment. Not all payments made to any employee as
gains or profit to an employee, the authorities said that that profit must
have been in reference to the services rendered in that employment. If
it was not income made in relation to services rendered in that office, then it
is not taxable. It must be in the nature of a reward for services.
The Court of Appeal agreed with that and it is the current definition. In
Kenyan case where income tax is on earnings or for services rendered, you pay
tax on it.
Payment in respect of employment or
services only for an employee, services which are rendered in Kenya or outside
Kenya in the case of a resident person or if the payment is made to a non-resident,
all of this may be taxed but only on the following condition, if the
non-resident is employed or rendering services to an employer who is resident
is Kenya, his income is taxable or if he is rendering services to a
non-resident who has a permanent resident in Kenya for which one works, for
example if he has a company here. Which means that even if one works for World
Bank but they are resident in Kenya they will be taxed.
In case of a non-resident a person is
chargeable to tax only on income that is accrued or derived from Kenya.
There are cases in the English system where employee’s income has been held not
to be taxable. There are 3 situations
1.
Where you have paid a gratuitous payment to an employee i.e. it is a gift or
any other voluntary payments;
2.
Where an employee has received payment under a contractual right which is
considered to be outside the scope of his employment;
3.
Where an employee receives payment after his employment has ceased or after it
has come to an end.
The first category of gift and other
voluntary payments – the case of
Seymour v
Reed
(1927) 11
TC 625
In this case the House of Lords
summarised the general principle in relation to income tax or chargeability of
gifts to income tax as follows “it must be settled that the words salary,
wages, fees … whatsoever (Section 5(2) (a) according to the judge One these
profits include payments made to the holder of an office by way of remuneration
for his services even if those services are voluntary so long as they are made
as payment by way of remuneration for services rendered. But these do not
include a mere gift or present. There are two types of voluntary gifts,
when employer makes a gift to an employee; this is made on a personal ground
and not by way of payment, secondly where someone other than the employer makes
the gift to an employee. In the case where the gift if made by employer
to employee the court went to say that they would have to be very exceptional
circumstances for the gift not to be taxable, for example if one was to give
their employee money to pay an ambulance for a spouse, that is a personal
payment and is not a remuneration for services rendered, it is a gift being
given for an employee but not in remuneration for services rendered. The
other example is where an employer gives a donation for burial for an
employee’s kin as a harambee, this is a free gift given not in relation to
services rendered but on personal grounds. It is not in the contract.
Ball v
Johnson
(1971)
TC 155
In this case the taxpayer was a bank
clerk and his contract of employment required him to sit for some examinations
referred to as examinations of the institute of bankers, which was a condition.
He fulfilled that and he studied sat for the exam and passed. He was
doing this at his own time not at his employer’s time. After that the
employer gave him £130 pounds, which was normal and was a gift stated in the
handbook as a gift. Was this a gift in relation to employment when he had
done this examination at his own time, the employee was only fulfilling a term
of the contract which does not mean rendering services. The Judge held
that that was not income that had arisen from his employment and
therefore was not taxable. Not all judges decide this for example in
Laidler v
Perry
(1966) 42
TC 351 –
In this case a group of companies gave
each of their employees that had worked for them for more than a year a gift
voucher of 10 pounds as a Christmas present. They could use the voucher
in a shop of their choice. Was that income for services rendered?
The matter went all the way to the House of Lords and they decided that the
vouchers were taxable under Schedule E as income from employment in our case
Section 3(2) (a) (ii). However the court went on to say that a gift by an
employer on purely personal grounds and not by way of payments for the
employee’s services is not taxable for example a bonus paid to a single
employee for exemplary service rendered. It is not a contractual right
and it is just a gift. If it is given to one person it is a personal
gift, given to all employees it is not personal. Some of the courts went
on to say that even tips are taxable. If an employer gives employee money
under pure benevolence, that income is not taxable. The general rule
is that gifts to an employee by his employer are taxable we have not
reached there maybe because we are incapable of chasing those gifts.
Where a person who is not an employer
makes gifts – it raises two problems, where rewards are given as a result of
services rendered but as voluntary gifts by people who are not employers.
Sometimes these are taxable, if earned by virtue of employment but where the
gifts are given personally and on personal grounds irrespective or whether or
not services have been rendered is not taxable. Good case in point is
that Wangari Mathai’s gift of 110 million is not taxable.
In the case of Calvert v Wainwright (1947) 27 TC 475 – A
famous good Judge Lord Atkinson held that the tips that are received by a Taxi
Driver in the ordinary course of business are taxable. In Wings v O’Connell (1927) IR 84 It was held
that the presents that a jockey wins are taxable. In Blakiston v Cooper
(1909) STC 347 it was held that a Parson’s Easter offerings to
the Church of England were taxable.
Taxability of gifts may depend on the
frequency or regularity in which they are given, if they are given frequently
and regularly then they may be considered as income for services
rendered. Lord Jenkins in the case of
Moorehouse
v Dooland
(1955)
36TC 1
Summarised it as follows:
- That income which is voluntary or the voluntary gift should be looked at as to whether it is by virtue of his office or employment,
- If the recipient of the gift in his contract of employment entitles him to receive that payment, in that case it will be most likely to be held that it arose out of rendering services.
- The fact that the payment is of a periodic or recurrent character may also support taxability although that would not by itself lead to a conclusion that it is taxable.
- Any voluntary payment which is given by way of a present on personal grounds may lead to a likely conclusion that it is not a profit accruing from employment and therefore not taxable.
CONTRACTUAL RECEIPTS
NOT ARISING FROM EMPLOYMENT:
Under the common law it is possible to
receive from an employer payment which one is entitled to not as payment for
services rendered. The best example is one given by Lord Denning in the
case of
Jarrod v
Bousted
(1964) 41 TC 701
in this case he gave the example
as follows: “ suppose there was a man who was an expert organist but
who was very fond of playing golf on Sundays and asked to become an organist
for a church for the 7 months that would follow at a salary of £10 pounds a
month but this church expressly provides that he would never play golf on
Sunday for those months he was working for them. The organist said
that if he had to give golf on Sunday they would have to give him an extra £5
pounds for not playing golf on Sunday and they obliged. Lord Denning
asked if the £5 pounds is payment for him as organist? Is it income for
services rendered? Lord Denning said that this was not payment for
services rendered to the church as an organist but a payment for relinquishing
what the organist considered to be an advantage to him. On the basis
of this reasoning, the Court of Appeal held in that case that a signing on fee
for an amateur rugby player to a professional rugby player, the signing on fee
is a fee for turning professional and for agreeing to pay for that particular
club. It was not income but a capital sum, which is compensation for his
giving up the amateur status and not income for services rendered.
A different case decided otherwise in
Riley v
Cogland
(1964) 44
TC 481
Ungoed
Thomas J. held that signing on fee of a Rugby player was taxable because
according to him it was paid into consideration of the taxpayer playing for the
club for the rest of his career. This was in the High Court in 1964.
The House of Lords has also held that
the fact that any payment would not have been made to an employee unless he was
an employee is not enough to make any income taxable, one must have been paid
because of that employment to be taxed the employment must be the cause of the
payment for services rendered.
There are substituted forms of
remuneration and an example was given in the case of
Holland v
Geoghegan
(1972) 48
TC 484
Here this taxpayer was on strike
with his colleagues and the employer paid him £450 pounds so that he can go
back to work, there was no requirement in his contract because under contract
he could only remain at work for 7 days and so the £450 pounds was meant to
make him to leave his trade union friends and come back to work. The judge held
that the main reason for payment of that money was to get the employment back
to work and that when he received that money it is by way of a substituted form
of remuneration and therefore it was taxable.
Dividends are taxed at a lower rate than salary, which can result in paying less personal tax.
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