Kapa Oil tried to pass off manager as a consultant

By Wahome Thuku

Kapa Oil Refineries, a company that manufactures edible oils and detergents, will have to pay Kenya Revenue Authority (KRA) more than Sh170 million in taxes.

In a case filed in the High Court in May 2009, Kapa Oil had three main bases of dispute. One had to do with commissions it paid to advertising company TAC and the dispute was on whether it was liable to payment of Withholding tax.

Another was on business dealings between Kapa Oil, a Zambian firm Gourock Ropes and Canvas and their Malaysian trading partners Kinsum Ltd. The issue was whether money paid by Kapa Oil to Gourock Ropes through Kinsum as discount, was liable to Withholding tax and VAT.

The third issue was, however, the most striking. It was in regard to employment status of one J M Ogode as a human resource manager by Kapa Oil and deductions of his Pay As You Earn (Paye).

Two-year contract

On August 1, 2003, Kapa Oil and Mr Ogode signed a two-year contract. Ogode, trading as J M Ogode Managing Consultant would provide human resource management support at Sh110,000 a month.

On December 18 of the same year, the Kapa Oil MD wrote to Ogode spelling out his duties as follows; providing human resource support services to the management, handling staff disciplinary issues in collaboration with the personnel manager and heads of department and representing the company in trade disputes at the Federation of Kenya Employers.

He would also chair the Health and Safety Committee, acting as security liaison officer for the company, liaising with Athi River and Machakos police in security matters and performing any other duties that would be assigned from time to time.

In another letter to the Kapa Oil finance director, on September 8, 2004, Ogode referred to himself as the human resource manager.

Indeed the letter was done on the company’s letterhead.

Ogode was writing regarding working hours and general work performance and he outlined his job description.

Trouble

Trouble arose for Kapa Oil when in 2007 and 2008, the company claimed refund of excess Vat from KRA. The taxman decided to audit the company from 2005 to 2008. The audit allegedly uncovered unpaid corporate taxes, withholding tax, and the Paye due to Ogode and demanded immediate payment. The tax bill was more than Sh168 million.

On May 14, 2009, Kapa Oil moved to court and sued the KRA and three commissioners.

Among the many orders that the company sought was to have KRA and the commissioners prohibited from classifying the payments made to Ogode Management Consultants or to Ogode himself as salary due to him as employee of Kapa Oil.

Kapa Oil claimed that Mr Ogode was not their employee but a human resource and management consultant.

The five per cent Withholding Tax was made on all payments to him but not Paye.

The company lawyer argued that there was evidence that Ogode was not an employee. In a letter addressed to Nairobi West Hospital Ogode had been informed by Kapa Oil that he would be responsible for his son’s medical bill.

The lawyer submitted that since the dispute related to payments of the principal tax, demand should have been made under Section 85(3) of the Income Tax Act and not under section 35 and 37.

Confused

The company said it believed the matter had been put aside for the moment but got confused when they received a letter dated March 23, 2009 demanding payment.

On their part, KRA maintained that Ogode offered human resource services to Kapa Oil. His title was a human resource manager and was thus an employee of the company. He had been offered an office and other facilities at the company premises.

Indeed, under the terms of engagement, he was required to report to work from 8am to 5pm like all other employees and was to be paid a monthly salary. His relationship with the company did not reflect the independence of a consultant.

KRA argued that a consultant could not be in charge of staff discipline as was the case with Ogode. And in the letter to Nairobi West Hospital, the company referred to Ogode as their employee.

So, Kapa Oil was liable to deduct his Paye under section 37(1) of the Income Tax Act failure to which legal action would follow, the taxman insisted. Section 37(1) requires an employer to deduct from an employee’s emoluments and account for tax.

The court framed eight issues for determination in the entire case but the question on Ogode status was whether he was an employee of Kapa Oil and thus liable to remit Paye to the taxman.

Expert

The Oxford Advanced Learner’s Dictionary defines consultancy as "expert advice in business, law, etc, and a consultant is an expert who gives such advice.

"From a consideration of the duties and responsibilities of Mr Ogode set out above...I am satisfied that he was an employee of the applicant (Kapa Oil Refinery)," Lady Justice Roselyn Wendoh held.

"There was total lack of independence in the performance of his duties and he was totally answerable to the applicant."

Justice Wendoh observed that Kapa Oil was deemed to have been appointed by the law as KRA’s agent for purposes of collecting the Paye from Ogode.

"By the applicant holding out Ogode as a consultant when he was a regular employee, it’s obvious Kapa Oil was evading the payment of Paye to the respondent (KRA) and I find that the demand made by the Respondent is lawful," the judge concluded.

She held that KRA acted in accordance with the law in its action to recover the payments.

The company also lost all the other applications and now the taxman is demanding his dues.

—The writer is a court reporter with the Standard Group