VAT vs. Turnover Tax (ToT): Which is Right for Your Small Business in 2025?

VAT vs. Turnover Tax ToT

Navigating tax obligations is one of the most critical aspects of running a small business in Kenya. With multiple tax regimes available, including Value Added Tax (VAT) and Turnover Tax (ToT), business owners must understand which system best suits their operations. Choosing the wrong tax system can result in unnecessary compliance costs, penalties, or lost growth opportunities.

This guide breaks down the key differences, requirements, advantages, and disadvantages of VAT vs. ToT for small businesses in 2025, helping you make an informed decision and maintain full tax compliance Kenya.

At Adamjee Auditors, we support small businesses in Nairobi, Mombasa, Kisumu, Nakuru, and beyond with tax compliance, bookkeeping, audit and assurance, and CFO advisory services to ensure business owners focus on growth while remaining compliant.

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Understanding VAT and Turnover Tax (ToT)

What is VAT?

Value Added Tax (VAT) is an indirect tax applied to the supply of goods and services. Businesses charge VAT on sales and can claim credit on purchases. In Kenya, the standard VAT rate is 16% as per the 2025 guidelines.

Key features:

• Monthly or bi-monthly filing via the KRA iTax portal

• Claimable input VAT on business purchases

• Mandatory for businesses with turnover above KES 5 million annually

Learn more about our Tax Compliance Kenya services.

What is Turnover Tax (ToT)?

Turnover Tax is a simplified tax regime for small businesses with annual turnover of KES 5 million or less. It’s designed to reduce compliance burden for micro and small enterprises.

Key features:

• Taxed on gross turnover at 1%

• Simple monthly filing via iTax

• No input VAT credit claimable

• No detailed accounting for VAT purposes required

Adamjee Auditors Bookkeeping Services help businesses decide which tax regime aligns with their financial records and business model.

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Step 1: Determine Your Eligibility

VAT eligibility:

• Businesses with annual taxable turnover above KES 5 million

• Voluntary registration allowed for businesses below threshold

ToT eligibility:

• Micro and small enterprises with turnover ≤ KES 5 million annually

• Engaged in services or goods not specifically exempted (financial services, real estate, betting)

Correct classification ensures compliance and avoids penalties from KRA audits.

Learn about our Audit Services Nairobi.

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Step 2: Compare Compliance Requirements

Small businesses often choose ToT to reduce compliance costs, while businesses with significant input VAT to recover prefer VAT registration.

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Step 3: Calculate Potential Tax Liability

Example for 2025:

• Business turnover: KES 4 million

• VAT if registered: 16% of sales, less input VAT credits

• ToT: 1% of gross turnover = KES 40,000 annually

Businesses with high input VAT on purchases may save more under VAT, even if turnover is below KES 5 million.

Use Adamjee iTax Compliance tools to calculate effective tax liabilities.

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Step 4: Filing and Payment Obligations

VAT:

• File via iTax

• Remit monthly by the 20th of the following month

• Maintain VAT invoices and input credit documentation

ToT:

• File simplified monthly returns via iTax

• Remit 1% of monthly gross turnover

• Minimal documentation required

Adamjee Payroll and Tax Compliance Kenya ensures businesses meet deadlines and avoid penalties.

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Step 5: Pros and Cons for Small Businesses

VAT Pros:

• Can claim input VAT

• Suitable for businesses purchasing high-value inputs

• Standardized across sectors

VAT Cons:

• Higher compliance burden

• Detailed record-keeping required

• Risk of audits higher

ToT Pros:

• Simplified tax filing

• Predictable low tax rate

• Reduced compliance costs

ToT Cons:

• Cannot claim input VAT

• Limited to businesses with turnover ≤ KES 5 million

• May be less advantageous for businesses with high expenses

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Step 6: Decision-Making Checklist

1. Assess annual turnover

2. Evaluate input VAT recoverable

3. Consider compliance capacity

4. Analyze cash flow impact of tax regime

5. Evaluate long-term growth plans (future VAT registration)

Adamjee CFO Advisory Services help businesses make strategic decisions aligned with growth and compliance requirements.

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Step 7: Common Mistakes to Avoid

• Registering for VAT unnecessarily

• Filing ToT when turnover exceeds KES 5 million

• Inadequate bookkeeping and record maintenance

• Late filing or payment leading to penalties

• Ignoring KRA updates on thresholds or rates

Adamjee Bookkeeping Services ensure records are always audit-ready and compliant.

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Step 8: FAQs

Q1: Can a business switch from ToT to VAT mid-year?
Yes, if turnover exceeds KES 5 million or voluntarily for business benefits.

Q2: What records must ToT-registered businesses keep?
Basic sales records, receipts, and proof of turnover.

Q3: How often must VAT be filed?
Monthly or bi-monthly via iTax, depending on KRA registration type.

Q4: Are there penalties for late filing of ToT or VAT?
Yes. Late filing incurs fines, interest, and risk of audit.

Q5: Can Adamjee Auditors advise on which tax regime is better?
Absolutely. We provide expert guidance on tax compliance Kenya and audit readiness.

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Partner With Kenya’s Trusted Tax Advisors

Choosing between VAT and ToT affects your business cash flow, compliance, and growth. Adamjee Auditors provides expert advice to help small businesses in Nairobi, Mombasa, Kisumu, Nakuru, and across Kenya make informed decisions.

Contact us today for a consultation on VAT, ToT, and broader tax compliance.

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