22 May 2025

Kenya Tax Appeals Tribunal offers a distinction between reimbursements and incidental costs for VAT purposes

  • Kenya Tax Appeals Tribunal ruled, on 21 March 2025, that staff costs incurred by a human resource outsourcing company were incidental to its core services.
  • The staff costs incurred by the human resource outsourcing company were part of the company's taxable value and thus subject to VAT.
  • The company had erred by failing to register for VAT, despite reaching the VAT registration threshold.
  • Taxpayers engaged in similar transactions and business models may need to reexamine the structuring of their transactions and contractual obligations to address VAT supply valuation exposures.
 

Executive summary

Kenya Tax Appeals Tribunal (TATor Tribunal) determined, on 21 March 2025, that a human resource (HR) outsourcing service provider's staff costs do not qualify as reimbursements because the costs were incidental to the company's supply of services.

The staff costs should therefore be deemed to constitute part of the taxable value of the supplies, the Tribunal concluded.

Background

Tazico Trading Company Ltd. (Appellant) is a limited liability company. Its principal business is the provision of recruitment consultancy and management services. The Commissioner of Legal Services and Board Co-ordination (Respondent) reviewed the Appellant's records and identified variances between turnover as reported on corporate income tax (CIT) returns and annual value-added tax (VAT) returns.

The income that the Appellant declared for CIT purposes had not been declared in its VAT returns. In fact, the Appellant was not registered for VAT.

Appellant's arguments

The Appellant argued that based on its business model it had not met the VAT registration threshold of five million Kenya Shillings (KES 5m) as provided for in Section 34 of the VAT Act. According to the Appellant, its principal business was providing recruitment consultancy and management services on behalf of its clients and its income stemmed from the management fees its clients paid.

The Appellant billed its clients staff costs as a reimbursement expense and explicitly itemized the staff costs in its invoices. The reimbursements did not constitute part of the taxable value under Section 13(5) of the VAT Act, and thus, the Appellant was not eligible for registration for VAT.

Respondent's arguments

The Respondent argued that staff costs were not reimbursements and constituted taxable value of the Appellant's supplies. According to the Respondent, the Appellant's principal business was providing labor and supervisory services and the consideration it received for supplying HR outsourcing services is the total service costs — that is, staff costs, which are incidental costs as provided for under Section 13 (5) of the VAT Act, plus the management fees.

The Respondent indicated that the employment contracts were between the employees and the Appellant, and the Appellant had assumed contractual obligations as an employer. The Respondent therefore contended that the Appellant had reached the VAT registration threshold.

Issues for determination

The Tribunal considered the facts of the case and framed the following issues for determination:

  1. Whether the services that the Appellant rendered were subject to VAT
  2. Whether the Respondent erred in registering the Appellant for VAT obligation

Analysis and determination

Whether the services rendered by the Appellant are subject to VAT

The Tribunal analyzed Section 13(5) of the VAT Act, which states that:

In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the making of the supply to the client: Provided that, if the commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value. [Emphasis added.]

The Tribunal further analyzed the employment contracts and concluded that the Appellant's supplies were labor and supervisory outsourcing services. As such, payroll costs were not reimbursements, but rather, the Appellant's own costs incidental to the supply of the outsourcing services. The taxable value of the Appellant's supplies was therefore the total service costs, comprised of the staff costs as incidental costs and the management fees.

Whether the Respondent erred in registering the Appellant for VAT obligation

The Tribunal noted that, in accordance with Section 34(1)(a) of the VAT Act, a person who makes taxable supplies exceeding KES 5m in any 12-month period is eligible for VAT registration.

Having established that the taxable value of the Appellant's supplies included staff costs, the Tribunal concluded that the Appellant was thus eligible to register for VAT. The Tribunal therefore held that the Respondent was justified in registering the Appellant for the VAT obligation.

Implications

The TAT decision has provided guidance on how to differentiate between a reimbursement and an incidental cost for VAT purposes. Taxpayers engaged in similar transactions and business models may need to reexamine the structuring of their transactions and contractual obligations to address VAT supply valuation exposures.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young (Kenya), Nairobi

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2025-1115