The client made a deposit. That's not your money!

A client pays you KSh 120,000 for 12 months of service.

You've received the money.

But have you earned all of it?

No.

You've only earned the portion of the service you've delivered. The rest is money you still have work to do for.

But here's where it gets tricky.

KRA may require you to account for VAT before you've earned the full amount.

In the Trina Kenya case, the Tax Appeals Tribunal ruled that VAT was due when an advance payment was received under the applicable tax rules.

The business accounted for it later and faced penalties and interest.

Here's what every business owner needs to understand:

When you've earned the money and when you must pay VAT are two different things.

And keep your paperwork.

Every deposit should be linked to a customer, an agreement and the relevant invoices.

Otherwise, explaining what that money was for can become difficult when questions arise.

A deposit can be money you haven't earned yet and still come with a tax obligation.

Don't spend it all just because it's sitting in your account.