Why you might pay more rent soon

A section of residential flats in Nairobi's Pipeline Estate in Embakasi on August 4, 2023. [Boniface Okendo, Standard]

Landlords may be forced to hike rent as the taxman descends on their businesses demanding the Affordable Housing Levy (AHL) from their gross rental income.

The Kenya Revenue Authority (KRA) has written to business owners reminding them to remit the 1.5 per cent levy by the 9th of every month starting this May.

“For clarity, AHL will be charged at the rate of 1.5 per cent on the gross income received or accrued. This includes: gross rental income, gross sales receipts (amount chargeable to turnover tax) and any other sales before subjecting the same to Value Added Tax (VAT),” reads a notice from the Head of Domestic Tax Department Operations, North Rift Region, Loyford Kubai.

While the notice dated May 6, 2024, addresses taxpayers in the North Rift Region, it is an indication that all other businesses in the country are being subjected to the same directive.

“We would also like to urge you to take advantage of the Tax Amnesty programme introduced in the Finance Act, 2023 by paying all the principal taxes outstanding for the period up to December 2022, by June 30, 2024,” the notice adds.

Rental income

Having landlords pay Affordable Housing Levy, and insisting it be done from gross rental income, is undoubtedly going to eat into their profits.

This is considering that landlords are also subjected to rental income tax currently charged at 7.5 per cent of gross rent received effective January 1, 2024, as stipulated in the Finance Act 2023. “The rate of tax is 7.5 per cent, effective January 1, 2024, on the gross rent received and is the final tax. No expenses, losses, or capital deductions are allowed for deduction from the gross rent,” says KRA in a breakdown of the tax. 

Until December 2023, this tax was charged at 10 per cent.

In addition, landlords some landlords may be subjected to double taxation if they have already paid their share of the Affordable Housing Levy through their formal jobs.

Employees are also required to pay 1.5 per cent of their monthly gross income as AHL which is to be remitted by their respective employers.

The AHL was brought to life in the Finance Act 2023 by amending the Employment Act of 2007, to include the clause that each employee and employer shall pay a monthly levy of 1.5 per cent.

“The purpose of the Affordable Housing Levy shall be to provide funds for the development of affordable housing and associated social and physical infrastructure as well as the provision of affordable home financing to Kenyans,” reads the Act.

“The AHL shall not be used for any purpose other than the development of affordable housing and associated social and physical infrastructure as well as the provision of affordable home financing to Kenyans.”

Numerous headwinds

Implementation of this levy has however encountered numerous headwinds which had lawmakers go back to the drawing board to formulate the Affordable Housing Act so that the levy be anchored in law as the courts directed.

The courts had declared it unconstitutional.

The Affordable Housing Act, of 2024, then came into effect on March 19, 2024. KRA subsequently released a notice stating that employers should deduct 1.5 per cent of the employee’s monthly gross salary and the same by the employer for remittance to the taxman by the ninth working day after the end of the month.

But despite this progress, the levy has been found to have numerous loopholes some of which may now subject landlords to double taxation and in the end increase the cost of rental units.

For example, you could have a landlord who has already paid their fair share of the levy through their employer but is required to also do the same as an employer who owns a block of apartments and has employed a caretaker to manage.

For some time, KRA’s focus has been on employers and employees with little emphasis on businesses and landlords in particular, even in their notice dated March 21, 2024, when the Affordable Housing Act came into force.

“With effect from March 19, 2024, all employers are required to deduct the AHL from the employee’s gross salary and remit together with the employer’s,” read the notice in part.

“All other persons who receive income or whose income is accrued in Kenya are required to remit 1.5 per cent of their gross income as the Affordable Housing Levy to KRA.”

The recent notice to taxpayers by KRA shows its efforts in ensuring everyone pays their fair share as the agency is also implementing the electronic tax invoice management system (e-TIMS) targeting business owners that is meant to ensure compliance.

The latest notice also could be in reaction to experts who had raised ambiguity in both the directives by KRA and the Affordable Housing Act which did not define what gross income or salary is for the levy to be tabulated as specified in law.

“This Act provides a well-defined framework for the Affordable Housing Levy when compared to the previous AHL. However, it does not define the terms “gross salary” or “gross income”.  If these terms are not well defined, the resultant ambiguity may result in over or under-deduction of the AHL by employers or self-employed persons,” says RSM Global, a tax consulting firm.

In the latest notice, KRA has gone ahead and specified ‘gross rental income’ in a bid to target landlords, and gross sales to target businesses while also adding ‘any other sales’ to ensure no income is left untaxed.

But as the State works round the clock to implement the AHL, some 22 legislators led by Busia Senator Okiya Omtatah are currently in court having filed a case that opposes the introduction of the levy.

Kenya Human Rights Commission and Katiba Institute also have filed similar cases bringing the number of suits against the levy to 10.