Businesses will now have to wait longer before applying for a VAT refund on qualifying bad debts under changes introduced by the Finance Act 2026.
The Kenya Revenue Authority (KRA) has said the waiting period has been extended from two years to three years.
This means businesses that have already accounted for VAT on a taxable supply but have not received payment from their customers will have to wait an additional year before seeking a refund on the unpaid amount.
KRA has advised businesses affected by the change to keep proper records that can support their refund applications.
These include invoices, evidence showing efforts made to recover the outstanding debt and other relevant documents.
VAT should only apply to taxable supplies
KRA has also clarified that businesses should only charge VAT where the underlying goods or services are taxable.
This means being registered for VAT does not, on its own, mean that a business should add VAT to every invoice it issues.
The tax authority has also highlighted changes affecting businesses whose supplies become exempt from VAT.
Where a business had already claimed input VAT on unsold stock before the supplies became exempt, it will be required to account for the relevant input tax in the return for the period when the change takes effect.
Changes affecting other businesses
The Finance Act 2026 has also increased the VAT-free allowance for qualifying goods brought into Kenya by returning passengers.
The allowance has risen from Ksh38,850 to Ksh259,000, subject to applicable customs rules and eligibility requirements.
Digital payment service providers will also be affected by the new VAT provisions.
KRA said fees and commissions charged for specified services, including payment processing, settlement, merchant acquiring, payment gateways and aggregation through digital platforms, are subject to VAT at the standard rate.
For businesses providing qualifying outsourcing services, employee-related costs incurred by the supplier will not be included when determining the taxable value.
These costs include salaries, wages and statutory deductions.
The law has also clarified how VAT applies to finance charges under hire-purchase arrangements.
Qualifying finance charges are excluded from the taxable value of goods where the supplier is licensed under the Hire Purchase Act.
New clarification for tour operators
KRA has further highlighted changes affecting the tourism sector, including the definition of qualifying tour operators and the treatment of “in-house supplies”.
The definitions provide clarity on the VAT exemption available to eligible tourism businesses.
KRA has urged businesses to review their invoices, contracts and records to ensure they are applying the correct VAT treatment under the new law.
The authority said businesses should pay particular attention to the requirements applying to their specific sectors and types of transactions as they adjust to the Finance Act 2026 changes.
