I haven’t ‘blogged’ for some time…things are busy coping with rating changes, difficult insurers, the new Finance Act, trying to launch new products and remotely overseeing an extension to my house in the UK!! I can cope with everything but the latter!!!
I wanted to write about an issue that came about many years ago, but was something our client said they would handle, but has arisen again and my client asked for some guidance on it this time. I do not have an absolute answer…whatever I say could be questioned by the KRA or DOSH, but I will give you my thoughts.
As most businesses will know, in the event of an injury/occupational illness at work, an employee is entitled to compensation as laid down in the Work Injury Benefit Act (the Act). Most businesses insure against it, those that do not, must still pay any compensation out of their own funds and the maximum benefit is a payment of 8 years of the employee’s salary for death or permanent total disablement. This benefit is scaled depending on the severity of the injury, and also includes benefits for temporary total disablement, i.e. someone in an accident and cannot work for up to one year, sometimes two.
To lay the foundations, when a claim is made DOSH opens up a file, informs the insurer and often calculates the amount of the claim. From our understanding DOSH will not close their file until the full amount is paid by the insurer or the business.
Recently, a client had the sad loss of life in their business due to a terrible accident. The calculation of the WIBA benefit was around KES 2.5m, which would really help the family financially. Under the terms of the any WIBA policy, the settlement payment must be made to the Policyholder, i.e. the company.
So here is the quandary: If the Company receives the KES 2.5m, is it classed as income and if so, are they expected to pay the 30% corporation tax on this? Some will say, no, pay the KES 2.5m out as compensation so you have a net nil gain, which means no tax to pay. Absolutely agree, but what if KRA do an audit and decide that this compensation is actually a ‘replacement’ for the employee’s salary for the next 8 years and they insist that PAYE is paid on the compensation. The Company then has to find around 30%. You may then say, pay the employee’s family the compensation, net of 30% tax, so KES 1.75m, and pay PAYE KES 750,000. Still a no net gain, so no Corporation Tax, but what then happens when DOSH ‘come a knocking’ and insists the full settlement received must be paid as per their file. You’ve paid the full amount out already, so will you have to give another KES 750,000 to DOSH. The same applies to any weekly benefit…who gets what?
Sadly, this is where I leave the quandary as I do not have the answer. Is it a case of ‘who shouts the loudest wins’? How much power do DOSH and the KRA have and who will win the argument? Maybe both and the employer loses out? Maybe there is a legal precedence that I do not know about or maybe there will be if it is challenged. Maybe, most WIBA claims are so small, they get ignored? As I say, I do not know the answers, but if anyone out there does, please let me know.
Out of interest, we sought professional advice and this is what they say:-
Gains and profits from any employment or services rendered are subject to income tax in the form of PAYE.These gains and profits have been defined as:
“any wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered, and any amount so received in respect of employment or services rendered in a year of income other than the year of income in which it is received shall be deemed to be income in respect of that other year of income”
Based on this definition, it is our view that compensation received under WIBA do not fit the criteria set out above, and therefore not subject to PAYE
Interestingly, no comment about whether it will be deemed as ‘revenue’ so therefore subject to corporation tax and secondly, note the most important words…’in our view’. Are we any clearer…are their parties to this who will argue this opinion? I’ve gone as far as I can for now, if I get anything else in, I’ll let you know.
If you have any questions on the above or can shed some light on the situation, please reach out to Jeremy on [email protected].
FOOTNOTE: Since the initial draft of this, one of our clients has kindly provided some information as follows:-
Section 5(2)(f)(ii) of the Income Tax Act exempts premiums paid by an employer for a group life policy cover for the benefit of his employees from taxation, unless such a cover confers a benefit to the employee or any of his dependents. This clause is deemed to apply to WIBA cover too. A taxable benefit arises upon the payment of compensation to the employee for injury or to his dependents in the event of his death.
So, the premium relating to any individual (thankfully not the amount of compensation) is taxable once the insurance payout is made.
Apparently the KRA made a challenge on this, and a ruling was made at a tribunal/court, so perhaps a precedence has been set.
If you would like to discuss your insurance policies, please get in touch: Email:[email protected] or Tel: + 254 (0) 709 455 000.