Lecture 3 · How A CEO’s personal account became a KSh 163.9m tax bill.

You are the chief executive and a co-owner of a growing distillery. Some customers pay into your personal account because it is quicker, and the board has passed a resolution saying that is fine. Four years later, KRA adds up every shilling deposited into your accounts and calls it your income.

Which documents do you reach for? Take a moment, because the answer decides the case.

The case.

Mary Wanjiru Kinyua was chief executive and a co-owner of Platinum Distillers, the maker of Momentum Ice vodka. KRA’s investigations department pulled her statements from Equity Bank and KCB for 2014 to 2017: two accounts in her name and one held jointly with a co-director. After adjusting for bounced cheques and splitting the joint account, investigators put the deposits at KSh 413.5m and treated them as undeclared income.

The first assessment, in April 2019, came to KSh 249.6m including penalties and interest. After her objection, the Commissioner cut it to KSh 163.9m in July 2019.

She gave three explanations. Some deposits were loans, from the company and from a businessman who had sent KSh 58m for her to buy a house on his behalf. Company resolutions dated 1 January 2014 had made her accounts collection points for company sales, so the money had already been taxed in the company’s hands. And her business expenses should have been deducted.

Asked for proof, she produced a summary table of the loans and no signed loan agreements. The resolutions did not name the accounts. Nor did she produce the company registry record, the CR12, showing that the people who signed them were directors.

The ruling.

The Tax Appeals Tribunal dismissed her appeal on 18 June 2021. It found the loans unproven, the resolutions too general and the deposits to be business income, taxable at 30%.

At the High Court, where an appeal from the Tribunal is confined to questions of law, she lost almost everything again. On 11 November 2022 Justice David Majanja held that “it is the duty of the taxpayer to prove that the decision of the Commissioner is incorrect”, and that summaries could not stand in for primary documents.

She won one point. The Tribunal had applied the 30% corporate rate to an individual. The judge held that “individuals are always charged according to an individual graduated tax rate”, and sent the objection decision back to be recalculated.

Exhibit 1: What the winning point was worth

Precursor calculation from the individual tax bands in force in each period, including personal relief for 2014 to 2017.

Across four years, the graduated bands could save her under KSh 300,000, less than 0.2% of a KSh 163.9m bill. Above about KSh 467,000 a year, both rates were 30%, and her deposits ran to roughly KSh 100m a year.

The idea: Mr Salomon’s boots.

In 1892 Aron Salomon, a boot and leather merchant in Whitechapel, east London, turned his business into a company. When the company failed, its liquidator argued that it was a sham and that Salomon should pay its debts himself. In 1896 the House of Lords disagreed. The company was a separate person in law, with its own assets and its own debts.

That decision is one of the foundations of modern business. It lets people risk a company’s money without risking their homes, and it lets the company’s income be taxed as the company’s. But the separation holds only while the owners respect it. Kinyua’s accounts blurred it in the direction that hurt most. The money sat in her name, so the law began from the presumption that it was hers.

Finance professors start from a simple observation: managers know more about a business than the people who fund it, and much of finance exists to manage that gap. Tax disputes run on the same logic. KRA could see the deposits. Only Kinyua knew where each one came from. Section 56(1) of the Tax Procedures Act puts the burden of proof on the taxpayer, which puts it on the person who holds the information. Without documents, the information stayed in her head, and the burden stayed with her.

The rate point carries a second lesson. Since July 2023, individuals pay 32.5% on income between KSh 6m and KSh 9.6m a year and 35% above that. A taxpayer in her position who won the same argument today would see the bill go up.

What a better-run CEO would have done.

Start with the easiest fix. A personal account should never act as the company’s till. A paybill, a till number or a company account costs little to open. If a customer pays you personally anyway, move the money to the company the same day, with a reference that ties it to the invoice.

If the board does decide that a director’s account may collect company money, the resolution names the bank, the account number, the period and the reason. Directors who appear on the CR12 for that date sign it, and the company secretary files that CR12 with the minutes.

Loans get loan agreements, signed when the money moves: amount, interest, repayment terms, board approval on the company’s side, and repayments that appear in both sets of books. Money held for someone else, such as KSh 58m for a house purchase, goes through an advocate’s client account on the owner’s written instruction.

At each year end, the CEO’s accountant reconciles every personal account into salary, dividends, loans, reimbursements and money held for others. The schedule and its documents are kept for at least the five years the Tax Procedures Act requires.

Lessons for the boardroom

1. Keep the company’s money in the company’s name. A personal account that collects sales invites KRA to treat the sales as personal income.
2. Write resolutions a stranger could audit. Name the account, the period and the signatories, and keep the CR12 that proves who they were.
3. Document every loan when it is made. A summary drawn up for the audit carries no weight.
4. Reconcile personal accounts every year. The burden of proof falls on whoever holds the information, and the law assumes that is you.
5. Price an argument before you run it. Kinyua’s rate point was worth less than 0.2% of her bill. Run today, it would raise the bill.

The deposits built up over four years. The paperwork to explain them needed to exist on the day each one landed.