Kenya TAT Rules Staff Costs Are Incidental and Subject to VAT for HR Service Providers

In March, the Kenya Tax Appeals Tribunal (TAT) decided in a case concerning whether staff costs incurred by an HR outsourcing service provider should be treated as reimbursements or part of the taxable value of the service.

The issue arose when the Commissioner of Legal Services and Board Co-ordination (the Commissioner) noticed that Tazico Trading Company, an HR outsourcing service provider, had failed to register for VAT and had not declared certain income in its VAT returns, despite reporting the same income in its Corporate Income Tax (CIT) return.

Main Questions and Tribunal Reasoning

After carefully examining all the case-related facts, TAT raised two key questions for consideration. The first one was whether the services provided by the HR company were subject to VAT. The second question considered was whether the Commissioner made an error by registering the company for VAT and imposing VAT obligations on it.

The TAT concluded that under the rules defined by the VAT Law, when calculating the value of a service for VAT purposes, any incidental costs incurred by the supplier in delivering the service to the customer must be included in the taxable amount. Nevertheless, the Law provides an exception to this rule. Therefore, when the supplier acts only as an agent, making a disbursement on behalf of a third party, such as a customer, this disbursement is not considered part of the taxable value.

After reviewing all relevant documents, including employment contracts, the TAT concluded that the services provided were subject to VAT. The taxable value was determined to be the total service cost, which included both staff-related costs as incidental costs, as well as management fees. Consequently, the TAT concluded that all the conditions for mandatory VAT registration had been fulfilled, and that the Commissioner had acted correctly and within its rights as provided by the law.

Conclusion

Ultimately, the TAT ruled that the HR outsourcing service provider's staff costs do not qualify as reimbursements because they were incidental to the provision of services by the company. Therefore, these costs are part of the taxable value of the service provided and are subject to VAT.

Taxable persons engaged in outsourcing, consultancy, or staffing models should carefully evaluate their contractual relationships and whether their cost recovery mechanisms may fall within the definition of taxable supplies.

Source: EY