You will now be held liable to prove tax compliance of your suppliers in addition to your own, following a landmark High Court judgement.
In a ruling that significantly tightened the standards for VAT claims and financial record keeping, the court made it clear that an invoice alone was no longer enough to justify VAT deductions.
This effectively overturns a long-standing belief that proper paperwork was sufficient to establish a valid supply. Therefore, in the event the Kenya Revenue Authority (KRA) questions a transaction, the responsibility falls squarely on the business to show that the supplier actually exists, was competent and genuinely delivered the goods indicated.
In other words, investigative duties have been transferred from the KRA to taxpayers, even when the taxpayer acted in good faith during the transaction.
The reasoning of the court is rooted in Section 17 of the VAT Act, which allows input tax deductions only when a valid, genuine supply has occurred. Documentation without real substance will thus not meet this threshold.
Following the latest decision, you can now face punishment for your supplier's non-compliance, even if you did not have any knowledge of wrongdoing. It remains your sole duty to prove that the supplier was legitimate.
The Case
The decision stemmed from a case where KRA audited a company and found potential compliance risk in its VAT and other tax filings. After an investigation into several years of business operations, the taxman found purchases claimed for VAT which appeared to come from "missing traders", as in suppliers who existed only on paper but did not actually deliver goods.
Previously, taxpayers often relied on invoices to claim VAT deductions, but the High Court clarified that an invoice alone was not enough, and a taxpayer must prove that the goods or services were actually supplied, even if it means providing evidence like delivery notes, transport logs, weighbridge tickets and other forms of proof.
Small and medium businesses are set to be the most affected by the new ruling, as it introduces a heavy administrative burden by shifting vetting from the taxman to them.
Also addressed in the ruling were unexplained bank deposits after an audit in the case in question found significant deposits which did not match declared income. The company at the centre of the ruling claimed some deposits were loans or inter-bank transfers.
The court thus reinforced the principle that any deposit in your bank account is presumed to be income unless you can provide clear evidence otherwise.
Going forward, verbal explanations or informal statements are no longer enough. Without proper documentation, KRA can treat the deposit as taxable income.
