Lecture 6 · A supervisor paid the casuals and got the tax bill

You are the finance director of a construction company. Your casual labourers have no bank accounts, and paying them in cash from the office is slow and risky. Your site supervisor has an account. Each week finance sends him a lump sum, he withdraws it and pays the crew.

It works. What have you just done to his tax file?

The case.

In 2016 Whitespace Technologies Limited in Nairobi did exactly that. David Luketelo Sifuma was on probation as a civil works site supervisor, without a formal letter of appointment. The company deposited lump sums into his personal account, his own pay among them, and he paid the casuals in cash. It also filed withholding tax returns against his PIN, as though he were a contractor billing for services.

From March 2017 the company paid his salary separately and deducted PAYE. A year later the job ended. In September 2018 KRA issued an estimated assessment of KSh 5,014,068, treating the 2016 payments as undeclared income.

Sifuma lived about 500 km from Nairobi and had no lawyer. When KRA summoned him to its Nakuru office in March 2019, officers told him to write an objection. He wrote one by hand, on the spot. It was 167 days past the 30-day limit in section 51 of the Tax Procedures Act, and nobody told him he needed to apply for more time. KRA confirmed KSh 4,360,059, citing the late objection and a lack of evidence.

He then reached his former employer. In June 2019 the company confirmed in writing that he had been an employee, that it had deducted PAYE, and that the withholding entries were its own error. It applied to KRA to cancel the certificates.

Exhibit 1: Three years to undo a payroll shortcut

The ruling.

Sifuma represented himself at the hearing in March 2021 and cross-examined KRA's witness. The witness accepted that the employer had applied to cancel the certificates, and that in those circumstances Sifuma stood discharged from the assessment.

The law still stood in the way. An objection filed late, without an application for more time, is invalid, so the appeal had nothing valid beneath it. The Tribunal struck it out.

It did not stop there. KRA had summoned an unrepresented taxpayer and told him to object without mentioning the extension he needed. That, the Tribunal held, fell short of KRA's duty under the Fair Administrative Action Act to act fairly. It directed Sifuma to apply for more time and ordered the Commissioner to decide his late objection on its merits, taking account of the employer's admission. Each side bore its own costs.

The idea: before the law.

In a parable Franz Kafka published in 1915, a man from the country arrives at the door of the Law. A doorkeeper tells him he cannot enter yet. The man waits for years on a stool beside the door, growing old. As he dies, he asks why no one else ever came. The doorkeeper answers that this door was meant only for him, and that he is now going to shut it.

Sifuma's door was the 30-day objection window. It was open to him alone, and nobody explained how to walk through it. The Tribunal could not reopen it. It pointed him to another.

Finance has a plainer version of the lesson: risk should sit with whoever can best manage it. A company that runs wages through a supervisor's account, and files withholding tax against his PIN, has moved its payroll risk onto the person least able to carry it. He was a probationary employee 500 km away, without a lawyer or the company's records. The company saved some administration. He carried a KSh 5m bill for three years.

What a better-run employer would have done.

It pays casuals directly. A bulk mobile money payment to each worker's phone, made in the company's name, leaves a payroll record that matches the muster roll. Where a worker has no phone or ID, it pays cash from its own float against a signed or thumb-printed sheet.

It files under the right label. A withholding certificate tells KRA that a person earned contractor income. Before filing one, finance checks that the payee really is a contractor and that the amount is a fee, not wages passing through.

It reconciles what it files about other people. A quarterly check of withholding and PAYE filings against payroll catches the error before KRA turns it into someone else's assessment. Whitespace corrected its mistake within days of being asked, in June 2019. A routine check would have caught it in 2016.

And the individual, whoever he is, keeps the 30-day rule in mind. An objection late by even a day needs an application for more time, with reasons, in the same letter.

Lessons for the boardroom.

1. Never route company money through an employee's account. On paper it becomes his income, and the burden of proving otherwise becomes his.
2. Label payments correctly. A withholding certificate is a statement to KRA about someone else's income. File it as carefully as your own return.
3. Reconcile what you file about others. Quarterly checks of withholding and PAYE filings catch errors before they become assessments.
4. Thirty days means thirty days. Object on time, or ask for an extension with reasons when you object.
5. Fairness is a defence, but a slow one. The Fair Administrative Action Act helped Sifuma three years after the bill arrived.

Whitespace saved itself a payroll run each week. The cost landed on a supervisor who never saw the books. A board that asks who carries the risk of each shortcut would have seen it coming.