[2024] KETAT 1575 (KLR)

Fairlands Investment Limited v Commissioner of Domestic Taxes Department (Appeal E384 of 2024) [2024] KETAT 1575 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1575 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E384 of 2024

Grace Mukuha, Chair, GA Kashindi, E Komolo & AM Diriye, Members

November 22, 2024

Between

Fairlands Investment Limited

Appellant

and

Commissioner of Domestic Taxes Department

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya whose business is the provision of estate agency and maintenance of principals’ premises.

2. The Respondent is the Commissioner of Domestic Taxes appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1), the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The Respondent carried out a compliance check on the Appellant’s tax returns for the period November 2021 to October 2022 and as a result, the Respondent issued a pre-assessment notice on the Appellant on 6th October 2023 and afterwards the Respondent raised an assessment of Kshs. 11,678,587. 66 on 1st December 2023.

4. The Appellant made a late objection on 9th February 2024 which the Respondent allowed.

5. In an Objection Decision dated 25th March 2024, the Respondent confirmed its additional assessment of Kshs. 12,379,302. 92.

6. Aggrieved by the said Objection Decision, the Appellant on 5th April 2024 lodged the instant appeal vide a Notice of Intention to Appeal of even date.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 12th April 2024, which was subsequently amended on 17th May 2024 raising the following ground:i.The Respondent erred in subjecting disbursements as vatable income and charged VAT instead of correctly treating the same as a recovery of costs incurred by the agent on behalf its principals.

The Appellant’s Case 8. The appeal is anchored on the following documents filed before the Tribunal:i.Appellant’s Statement of Facts dated 12th April 2024 and amended on 17th May 2024. ii.The Appellant’s Written Submissions dated 29th July, 2024 and filed on 30th July, 2024.

9. The Appellant stated that it was contracted as a management agent of buildings and properties for various third parties, being the property owners.

10. The Appellant stated that it was a contractual term that the third parties were to reimburse the Appellant for the emoluments paid to Appellant’s staff deployed to maintain the buildings and properties and that the employees seconded to maintain the buildings and properties are actually employees of the Appellant and could never be employees of the property owners.

11. The Appellant stated that it charged management fees which is vatable and is correctly declared as such.

12. The Appellant stated further that during the assessment, the disbursements which is the subject of this appeal was left out in computing chargeable income in the Income Statements and the Respondent concurred with the treatment of them as such.

13. The Appellant averred that the Respondent on 24th November 2023 raised a demand of Kshs. 12,379. 302. 92 broken down as follows: -Tax Head Principal Amount Penalties Interest Totals

VaT 11,678,587. 66 583,929. 38 116,785. 88 12,379,3O2. 92

Total 11,678,587. 66 583,929. 38 116,785. 88 12,379,3O2. 92

14. The Appellant stated that upon lodging an objection, the Respondent confirmed the tax liability of Kshs. 12,379,302. 92 on 25th March, 2024.

15. The Appellant asserted that it still holds that the tax liability raised by the Respondent of Kshs. 12,379,302. 92 is erroneous based on both law and fact.

16. The Appellant stated further that there was no margin or mark up on the disbursements as they were recovery of salaries paid to employees seconded to the various properties.

17. The Appellant contended that it had several employees who were seconded to the third-party property owners.

18. The Appellant argued that from the above, it could be observed that the Respondent made an error in subjecting disbursements as vatable income and charged VAT instead of correctly treating the same as a recovery of costs incurred by the agent on behalf its principals.

19. The Appellant relied on the provisions of Section 13(5) of the VAT Act 2013 which provides that –“Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement for a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

20. The Appellant contended that;i.The Respondent erred in treating the disbursement as income since payroll cost is reimbursable cost and there is no margin or markup on the same.ii.The Respondent erred in finding that the Appellant is a service provider and not an agent in all respects as far as the contracts between itself and principalsiii.The Respondent erred by charging VAT on disbursements which are cost to cost; andiv.The Respondent erred in subjecting disbursements as vatable income and charged VAT instead of correctly treating the same as a recovery of costs incurred by the agent on behalf its principals

21. The Appellant submitted that it is an agent and not a service provider as evidenced by the contracts between it and the various third parties. Therefore, the disbursements it received from the said third parties were merely reimbursement of payroll cost which the Appellant recovers from its clients.

22. The Appellant relied on the provisions of Section 13(5) of the VAT Act and further submitted that the invoices produced demonstrate salary recharge and the same is reflected in the payroll. In the premises, charging VAT on such disbursements is erroneous and not supported by the VAT Act as alleged by the Respondent.

23. The Appellant submitted that for the year ending 31st October 2022, the income declared was Kshs. 27,132,527. 00 of which VAT was levied, declared and paid. Thus, the Appellant asserted that the Respondent erred in levying VAT on both the income and disbursements totaling to 100,252,585. 36.

24. The Appellant relied in the case of Mount Kenya Bottlers ltd & 3 others -vs- Attorney General & 3 others [2019] eKLR and the holding by Judge Rowlett in Cape Brandy Syndicate -vs- l. R. Commissioners [1921] 1 KB in urging this Honorable Tribunal to look at the wording of the VAT Act and conclude that there was an error committed by the Respondent.

25. In view of the foregoing, the Appellant asserted that it has discharged its burden of demonstrating that the Respondent’s additional assessment of its tax liability was excessive, consequently, proving that the Respondent erred in raising VAT assessment on employment income which is reimbursable disbursement, while considering the work done by the Appellant’s employees at the clients’ premises as a service, and not as work assigned to such employees.

26. In conclusion, the Appellant prayed that this Tribunal finds that –a.The appeal be allowed with costs;b.The objection decision dated 25th March 2024 be annulled and set aside in its entirety; andc.The Tribunal do vacate the additional assessment that resulted from the omission and/or commission and errors made by the Respondent.

The Respondent’s Case 27. The Respondent’s case is premised on the following documents filed before the Tribunal:a.Respondent’s Statement of Facts dated 17th May 2024. b.Respondent’s Written submissions dated 30th July 2024

28. The Respondent averred that it conducted a compliance check on the Appellant’s tax returns for the financial year 2022, which revealed that the Appellant had categorized several sales as exempt supplies with regards to management services offered by the Appellant to various companies which were not exempt from VAT.

29. As a result of these revelations, the Respondent averred that it proceeded to issue a pre-assessment notice on the Appellant dated 6th October 2023.

30. The Respondent stated that the Appellant disputed the said pre-assessment notices and in support of their disputations provided various documents including bank statements, contract agreements with several clients, general ledger and signed audited financial statements.

31. The Respondent stated that it examined the documents provided by the Appellant together with the other information available to the Respondent and as a result the Respondent proceeded to raise assessments on the Appellant on the 1st December 2023 amounting to Kshs. 11,678,587. 66.

32. The Respondent averred that aggrieved by the Respondent’s assessment, the Appellant made a late objection application on the 9th February 2024 objecting to the said assessments raised by the Respondent, which the Respondent nevertheless allowed.

33. The Respondent stated that it proceeded to consider the Appellant’s objection and issued its Objection Decision on the 25th March 2024 fully rejecting the Appellant’s objection and confirming Kshs. 11,678,587. 66 with resultant penalties as due and payable whereupon the Appellant filed the instant appeal.

34. The Respondent reiterated its position as stated in the Objection Decision and in response to the Memorandum of Appeal and Statement of Facts of the Appellant stated as follows:a.In response to ground 1 of the Memorandum of Appeal, the Respondent averred that it is indeed true that payroll costs are reimbursable but the same are not available to the Appellant and that the same are available to only the recipients of the supply of service. The Respondent further averred that the Appellant was a supplier of services to various clients and they were not recipients of any services and as such no payroll cost were reimbursable to them. The Respondent averred that it is upon the Appellant to prove any incidental costs incurred by it in the course of making the supply as per Section 13(5) of the VAT Act, but the same disbursements to a third party as an agent to their client are excluded. The Respondent averred that based on the contracts provided, the Appellant was reimbursed of any incidental costs and other charges by their clients.b.In response to ground 2 of the Memorandum of Appeal the Respondent averred that the Appellant is a service provider involved in supply of services as per the definition of Section 2 of the VAT Act and as such VAT is chargeable on the services they provide.c.In response to ground 3 of the Memorandum of Appeal, the Respondent averred that VAT was properly charged on the consideration paid to the Appellant by the various companies to whom the supplies were made to and this was correctly done pursuant to Section 13 of the VAT Act.

35. The Respondent averred further that:a.the Appellant is a provider of taxable supply and the services offered by it fit the definition of supply of services as defined under Section 2 of the VAT Act.b.The Appellant performs services for their various clients for provision of management services and as such the same fit the definition of supply of services and that the provision of these services are subject to VAT as per Section 5 of the VAT Act.c.Section 13(5) provides that even though incidental costs incurred by the supplier of the services may be included in the taxable supply the same is excluded if the supplier has merely made a disbursement to a third party as an agent of his client.d.On the contracts provided by the Appellant it was clear that the expenses incurred by the Appellant in the day to day managing of the premises were being remunerated and reimbursed by the principal and since the Appellant was being reimbursed on some of the contracts then it could not claim disbursements or incidental costs as Section 13(5) excludes costs made to third party when made as an agent of the client and in the said contracts these costs were being reimbursed by the clients.

36. The Respondent relied on the provisions of Section 13(1), (4), & (5) of the VAT Act and submitted that the Appellant ought to have charged the full invoice amounts for VAT on both payroll costs and the management fees paid to them by their respective clients.

37. The Respondent cited the definition of supply of services under Section 2 of the VAT Act and the case of Trustees of the Nell Gwyn House Maintenance Fund -vs- Customs and Excise Commissioners [1999] STC 79 and further submitted that the taxable value of the supply is the consideration for the supply and the consideration is the total amount of money paid or payable directly or indirectly by any person for the supply.

38. The Respondent thus contended that the hiring of employees by the Appellant constituted a supply, hence the total consideration for the supply of services by the Appellant should include both the management fees and the payroll costs paid to them by their clients.

39. The Respondent referred to the provisions of Section 13(5) of the VAT Act and stated that the contracts between the Appellant and the various third parties provided that all the Appellant’s staff deployed to maintain the building were to always remain employees of the Appellant, thus payments made to the said employees cannot be said to be disbursements. In the premise, the Appellant’s argument that the said employees were seconded is contrary to the terms of the aforesaid contracts. In addition, in paying the said employees, the Appellant was discharging its own obligations and not as an agent of the client.

40. The Respondent cited the cases of Revenue and Customs Commissioners -vs- Loyalty Management UK Ltd [2013] UKSC 15, [2013] STC 784 and submitted that in determining the concept of consideration of a supply, the Tribunal ought to be guided by the fact that a supply for services for consideration presupposes the existence of a direct link between the services provided and the consideration received. In submitting that the payroll costs reimbursed to the Appellant by its clients do not meet the definitions of disbursements as provided for under Section 13 (5) of the VAT Act, thus the same ought to be brought to charge as a supply, the Respondent relied on the case of Adecco UK Limited -vs- The Commissioner for Her Majesty’s Revenue & Customs UKUT 133 (TCC).

41. In conclusion, the Respondent prayed that this Honourable Tribunal finds that:a.The Respondent’s objection decision dated 25th March, 2023 be upheld; andb.This Appeal be dismissed with costs to the Respondent.

Issues For Determination 42. Upon consideration of the instant appeal, the statements of fact by the parties herein and the written submissions of the parties, the Tribunal is of the view that the single issue that arises for determination is: -i.Whether the Objection Decision dated 25th March, 2024 was justified

Analysis And Determination 43. In this case, the Respondent submitted that the employment of staff by the Appellant at the premises managed by them amounted to a supply and as such the total consideration for the supply of the appellant services should include both the management fees and the payroll costs paid to them by their clients. On the other hand, the Appellant submitted that the Respondent made an error treating the salary amounts as vatable income and charged VAT instead of correctly treating the same as disbursements in respect of recovery of costs incurred by the agent on behalf its principals.

44. Section 5 (1) of the VAT tax defines Value Added Tax as hereunder –A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on –a.taxable supply made by a registered person in Kenya;b.the importation of taxable goods; andc.a supply of imported taxable services.

45. A taxable supply on the other hand is defined under section 2 of the VAT Act as follows –“taxable supply” means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business;

46. The Appellant who is a registered person in Kenya entered into a contract with several of its clients. According to the contracts, the clients appointed the Appellant to be their lawful agent, to manage and supervise the properties and buildings.

47. From the aforesaid contracts, it is evident that it was agreed that the Appellant would in the name of the owner and on the owner’s behalf do and execute all and each of the acts under the same contract, such as negotiating rent and license fees with tenants to procure the due preparation, execution, stamping and registration of letters of offer, leases and licenses; and to do all things necessary to manage the properties as stipulated in the agreements.

48. The Appellant attempted to rely on Section 13(5) which provides that if the Commissioner is satisfied that the supplier has merely made a disbursement for a third party as an agent of his client, then such disbursement shall be excluded from the taxable value. However, the Respondent contended that the amounts are chargeable since the payroll costs are paid to the Appellant for supplying the service and that the same are not to be excluded as they do not meet the proviso to Section 13(5) of the VAT Act.

49. The Tribunal has noted from the agreements that the Appellant was paid certain amounts as management fees and in addition, was to be reimbursed all costs in relation to maintenance of the buildings.

50. Of relevance to the issue in contestation in this appeal, the Appellant was to be reimbursed emoluments paid to the Appellant’s staff deployed to maintain the respective client buildings. The agreements further provided that staff deployed by the Appellant to the clients’ premises would at all times remain staff of the Appellant.

51. In view of the foregoing, the Tribunal is of the considered view that the services rendered, including the deployment of staff at the clients’ premises by the Appellant amount to a taxable supply, and are therefore subject to value added tax as there is a direct link between the services provided by the Appellant and the consideration received therefor.

52. In light of the foregoing, the Tribunal finds that reimbursable disbursements in the instant Appeal are subject to tax pursuant to the provisions of Section 5(3) and (4) of the Value Added Tax, which states as follows –Section 5(3) Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.Section 5(4) the amount of tax payable on a taxable supply, if any, shall be recoverable by the registered person from the receiver of the supply, in addition to the consideration.

53. From the foregoing, it is the finding of the Tribunal that the Appellant had a duty to charge its clients VAT upon issuance of invoice for payments and thereafter, remit the received VAT to the Respondent. This means that failure to include a VAT charge on its invoices, the Appellant would be liable to pay the VAT on the reimbursable amounts it received on account of payroll costs.

54. Accordingly, it is the finding of the Tribunal that the Respondent’s Objection Decision dated 25th March 2024 was justified in the circumstances and we so hold.

Final Decision 55. The upshot of the above is that the Appellant’s appeal is not merited. As a result, the Tribunal makes the following orders; -a.The appeal herein be and is hereby dismissed.b.The Respondent's objection decision dated 25th March 2024 be and is hereby upheld.c.Each party to bear its own cost.

56. Orders Accordingly.

DATED AND DELIVERED AT NAIROBI ON THIS _22NDDAY OF NOVEMBER 2024. ..............GRACE MUKUHACHAIRPERSON...............GEORGE KASHINDIMEMBER...............DR. ERICK KOMOLOMEMBER...............ABDULLAHI DIRIYEMEMBER