Managing cash flow is a critical aspect of successfully running a business. As tax obligations fall due, businesses must balance satisfying the Kenya Revenue Authority (KRA) while meeting other operational and investment needs.
One effective strategy for managing cash flow is leveraging overpaid taxes to reduce future tax burdens or offset existing liabilities.
Overpaid taxes can arise from various sources, including corporate income tax, Value Added Tax (VAT), and other tax credits.
For instance, corporate income tax overpayments often result from significant instalment taxes, Withholding Tax (WHT), or advance tax credits that exceed the annual income tax liability.
Similarly, VAT overpayments occur when a taxpayer’s output VAT is less than the input VAT, which may happen due to lower-than-expected sales or when a business deals primarily in zero-rated or exempt supplies.
To address overpaid taxes and optimise cash flow, KRA’s iTax system offers two valuable tools: the Overpayment Adjustment Voucher (OAV) and the Instalment Adjustment Voucher (IAV).
These tools, administered under the Tax Procedures Act, 2015 (TPA), provide taxpayers with mechanisms to manage their tax positions more efficiently and reduce the need for immediate cash outflows during tax compliance periods.
An OAV is issued to taxpayers with overpayments arising from withholding tax credits. It allows the taxpayer to apply the overpaid amount toward other tax obligations. On the other hand, an IAV is automatically generated after filing the income tax return, specifically for overpayments resulting from instalment taxes.
These vouchers can be used to offset future tax liabilities or outstanding tax debts, offering a practical alternative to waiting for a cash refund.
Taxpayers may apply to the Commissioner for a refund of the overpaid tax or request that the overpayment be applied to current or future liabilities. Refunds must be claimed within five years for income tax and within 12 months for other taxes.
However, the refund process can be time-consuming and may involve delays, especially if KRA does not disburse the approved refund within six months of verification. In such cases, the system generates a Refund Adjustment Voucher (RAV), which acknowledges the refund but does not immediately resolve the cash flow issue.
In contrast, an OAV is typically easier to obtain and can be used almost immediately. Taxpayers can initiate the OAV process through the iTax platform, and once approved, the voucher is issued instantly.
This provides a seamless and efficient solution for businesses looking to manage their tax obligations without tying up working capital.
The ability to use OAVs across various tax heads further enhances their utility, allowing businesses to apply them where they are most needed.
The IAV also plays a crucial role in managing cash flow. Since it is generated automatically upon filing the income tax return, it eliminates the need for a separate application process. This allows businesses to adjust their instalment tax obligations without making additional cash payments, which can be particularly helpful during periods of tight liquidity.
To make the most of these tools, businesses should adopt proactive tax management practices. Filing tax returns early is essential, as it triggers the generation of OAVs and IAVs and provides more time to plan their application.
Accurate record-keeping is equally important, as it supports overpayment claims and ensures that the amounts being claimed are valid and verifiable. Engaging a qualified tax professional can also be beneficial, especially when navigating the complexities of the TPA and ensuring that all procedural requirements are met.
Beyond immediate financial relief, OAVs and IAVs offer strategic advantages. They reduce reliance on external financing, improve the predictability of tax-related cash flows, and allow businesses to allocate resources more effectively.
For companies operating in sectors with seasonal income or fluctuating revenues, these tools can provide much-needed stability and flexibility.
Moreover, the use of OAVs and IAVs aligns with broader financial planning goals. By integrating tax overpayment management into their overall cash flow strategy, businesses can enhance their financial resilience and reduce the risk of penalties or interest arising from delayed tax payments.
This approach also fosters a more collaborative relationship with the tax authority, as it demonstrates a commitment to compliance while optimising financial performance.
In conclusion, leveraging overpaid taxes through OAVs and IAVs can significantly enhance cash flow management for businesses.
These tools offer a practical and efficient way to manage tax obligations, reduce financial strain, and support long-term business sustainability.
By understanding and utilising these mechanisms, taxpayers can ensure smoother financial operations, maintain compliance with tax laws, and achieve greater control over their working capital.
Joseph Khaemba isan associate director, and Geoffrey Nyamweya is a manager in the Tax and Legal Services practice, PwC Kenya.
