[2024] KETAT 1664 (KLR)

Lead Human Capital Limited v Commissioner of Domestic Taxes (Tax Appeal E064 of 2024) [2024] KETAT 1664 (KLR) (Commercial and Tax) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1664 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E064 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Lead Human Capital Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a human capital resource company incorporated in Kenya under the Companies Act Cap 486 and provides Human Resources services offering staff outsourcing, training, human resource consulting, payroll administration and overall labour relationship management.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 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. Following a returns review on Appellant’s income tax return and the turnover in VAT returns, the Respondent issued a pre-assessment notice on 16th May 2023 pursuant to Section 59 of the Tax Procedures Act, CAP 469B(hereinafter “TPA”). On even date, the Appellant in an electronic mail explained the source of the variance highlighted by the Respondent who in turn requested for copies of invoices and bank statements.

4. On 23rd May 2023, the Appellant delivered the requested documents at the Respondent’s office.

5. In a return review dated 18th September 2023, the Respondent demanded Kshs. 28,743,241. 00 in taxes arising from the aforementioned variance.

6. On 22nd September 2023 the Appellant lodged a response letter seeking clarification concerning the source and legal justification of the figures mentioned by the Respondent in their return review and further requested for a technical ruling.

7. Subsequently, the Respondent issued an i-Tax assessment on 5th October 2023. On even date, the Appellant reiterating the contents of the letter dated 22nd September 2023, insisted that it would only file an objection on iTax if the Respondent adhered to the prescribed procedures outlined in Section 31(8) of the TPA. In response, the Respondent on 9th October 2023 maintained that it adhered Section 31(8) of the TPA when issuing the assessment.

8. On 17th October 2023, and as a follow-up of the 22nd September 2023 letter, the Appellant vide an electronic mail sought an official response noting that the letter of 9th October 2023 had omitted reference to technical ruling request which had been requested vide multiple electronic mail correspondence.

9. On 18th October 2023, the Respondent advised the Appellant to lodge its notice of objection pursuant to Section 51 of the TPA if they were dissatisfied with Respondent’s additional assessment. The Appellant lodged its objection on 25th October 2023 challenging the Respondent’s assessment.

10. On 31st October 2023 vide an electronic mail, the Respondent issued an advisory notice to the Appellant pointing out deficiencies in their notice of objection and requiring the Appellant to implement necessary corrections to be done by 11th November 2023.

11. In an electronic mail dated 14th November 2023, the Appellant informed the Respondent of not having seen the electronic mail dated of 31st October 2023 and requested for more time which was granted by the Respondent on 15th November 2023 and on even date, the Appellant validated their objection by attaching supporting documents.

12. On 21st November 2023, the Appellant requested a meeting with the Respondent to present its case. The Respondent agreed to meet and during the meeting the Appellant pleaded its case and sent its bjection on 22nd November 2023 vide electronic mail.

13. The Respondent rendered its objection decision on 15th December 2023 confirming VAT assessment of Ksh 28,743,241. 00.

14. Aggrieved by the Respondent’s objection decision dated 15th December 2023, the Appellant lodged its Notice of Appeal dated 8th January 2024.

The Appeal 15. The Appeal was predicated on the following grounds as laid-out in the Memorandum of Appeal dated 18th January 2024 and filed on 22nd January 2024;i.That the Respondent committed a legal and factual error by imposing Value Added Tax (VAT) on payroll costs, contravening the stipulations of Section 2 and Section 13 of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).ii.That the Respondent made legal and factual mistake by neglecting to furnish the Appellant with written explanations concerning the legal basis of the assessment, in violation of the provisions outlined in Section 31(8) of the TPA.

Appellant’s Case 16. The Appellant’s Statement of Facts were dated 18th January 2024 and filed on 22nd January 2024.

17. The Appellant addressed the two grounds it had laid out in its Memorandum of Appeal as follows:

18. It was the Appellant’s case that the Respondent committed a legal and factual error by imposing VAT on payroll costs contravening the stipulations of Section 2 and Section 13 of the VAT Act and further by neglecting to furnish the Appellant with written explanations concerning the legal basis of assessment which was a violation of Section 13(8) of the TPA.

19. The Appellant stated that during the month of January 2021, it issued two invoices, the first one for 277 employees each earning Ksh 1,000 for Kshs 321,300. 00 comprising management fees of Kshs 277,000. 00 and VAT of Kshs 44,320. 00 while the second invoice was for Kshs 7,446,572. 95 consisting of Kshs 7,243,641. 59, NSSF contributions of Kshs 27,700. 00 and additional NSSF charges of Kshs 175,231. 00 noting that imposition of VAT on the two invoices would result in exorbitant tax liability of Kshs 1,242,859. 68 which would surpass the Appellant’s actual income of Kshs 277,000. 00 rendering such an approach illogical.

20. The Appellant stated that labour outsourcing agreements principally function to mitigate potential labour-related conflicts for companies in return for risk mitigation wherein companies compensate human resource firms with a management fee to supervise and manage these potential issues. That these firms act as subcontractors, providing management services to assist their principal entity in mitigating the impact of labour related risks thereby improving flexibility and consistency in human resources management for their clients.

21. The Appellant asserted that it consistently renewed contracts annually since the year 2018 and that the contract under consideration spanned from February 2020 to January 2022 and contested the Respondent’s assertion that the contract under scrutiny was dated 1st March 2022.

22. The Appellant held that contrary to Respondent’s assertion that payment for the VAT returns filed in October 2023 served as implicit concessions in support of the Respondent’s position, the Appellant made the payments based on the advice of the Respondent whom the Appellant now considers as having acted in deceit, intimidation and executed the same in bad faith.

23. That whereas the Respondent imposed VAT based on discrepancies noted between sales figures reported in VAT returns and those in the income tax returns for the period, the disparity stemmed from Appellant’s approach of declaring sales for VAT purposes that was solely based on management invoices while for income tax reporting, both management invoice and payroll invoices were disclosed with payroll invoices utilized as expense.

24. The Appellant asserted that the division of invoices was for clarity on the composition of total cost and to determine the eventual application of VAT. It was thus wrong for the Respondent to apply VAT to the entire amount including payroll invoices which included subitems such as salary costs, NSSF NHIF etc, yet VAT Act’s definition of business explicitly excludes employment costs. Moreover, VAT as a consumption tax presumes that tax is borne and settled by the end consumer and inclusion of payroll costs which have already undergone PAYE taxation was akin to double taxation.

25. The Appellant asserted that during the review period, it acted as an agent for Coastal Bottlers Limited in disbursing funds to the Respondent in respect to PAYE and Employees salary, thus, such disbursements ought to be excluded from taxable value pursuant to Section 13(5) of the VAT Act since the cited Section outlines taxable value of a supply as being determined by consideration for supply, or if the supplier and recipient are related, by the open market value of the supply. Additionally, that when calculating the value of services, incidental costs incurred by the supplier are included, except for disbursements made to a third party as an agent of the client, which are excluded from the taxable value if the Commissioner is satisfied with the agency arrangement.

26. It was the Appellant’s case that even the contractual stipulations executed with Coastal Bottlers Limited designated it as an agent for all human capital and acted as a disbursing agent for the payroll costs which should not be included in the invoiced amounts save for the contractual management fee that should be subjected to VAT. Additionally, that Clause 8. 1.4 of the contractual agreement stipulated that the Appellant should maintain separate accounts for reimbursements of staff remuneration and for management fees. The Appellant insisted that reimbursement was not compensation or payment of services provided but included payroll costs, NSSF, NHIF and similar disbursements which did not represent financial outlays for the Appellant and should not be subjected to VAT in aligning with the legal principle “tributum tributo non potest”

27. It was the Appellant’s case that stringent and literal reading of the VAT Act entails refraining from entertaining any interpretations beyond the explicit provisions delineated in the statute as was reinforced in legal precedents in the cases of Republic v Commissioner of Domestic Taxes Large Tax Payer’s Office ex-parte Barclays Bank of Kenya Limited [2012]eKLR and Keroche Industries Limited v Kenya Revenue Authority & 5Others [2007]eKLR both of which affirmed the principle as established in the case of Cape Brandy Syndicate v IRC(1)(1930)12 TC 358.

28. The Appellant asserted that in line with the provisions of Section 30 of the Tax Appeals Tribunal’s Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”), it diligently adduced all relevant sales invoices, contract copies and bank statements that offered a detailed account of transactions along with clear evidence of payments. That as a result, the burden of proof shifted to the Respondent who was required to prove the illegitimacy of the Appellant’s records as was held in the case of Shreeji EnterprisesLimited vs Commissioner of Investigations and Enforcement [TAT No. 189 of 2019] where the Tribunal in drawing inspiration from the decision in Hickman Motors Canada[1997] 2 S.C.R 336 held that the initial burden of proof rests with the Appellant and once a prima facie case was established, the onus shifts to the Respondent to rebut it.

29. It was the Appellant’s case that it adduced clear, unchallenged and uncontradicted evidence whereas the Respondent failed to present any contrary evidence apart from mere convenience, thus the Appellant was bound to succeed having sufficiently justified their position with comprehensive evidence.

30. On the Second issue, that the Respondent made a legal and factual mistake by neglecting to furnish the Appellant with written explanations concerning the legal basis of the assessment, in violations of the provisions outlined in Section 31(8) of the TPA, the Appellant stated that there was lack of formal written notification conveying the assessment.

31. Further, the Appellant asserted that the Respondent hastily executed the assessment with the primary purpose of preempting the Appellant from obtaining a Commissioner’s private ruling as couched under Section 65 of the TPA noting that such an application requires that it does not pertain to an Applicant undergoing a tax audit, is under objection, or has received a notice of assessment. The Appellant insisted that the conduct of the Respondent ought to be condemned as a procedural transgression and an abuse of official authority.

Appellant’s Prayer 32. The Appellant’s made the following prayers to the Tribunal:a.That the Respondent’s objection decision contained in the letter dated 15th December 2023 demanding payment of Ksh 28,743,241. 00 be set aside fully.b.That the Appeal be allowed with costs.c.Any other orders that the Tribunal may deem fit.

The Respondent’s Case 33. The Respondent replied to the Appeal through its Statement of Facts dated 22nd February 2024 and filed on 23rd February 2024.

34. The Respondent stated that its return review for February 2020 to January 2022 established variances between the turnovers in sales declared in the income tax returns and the VAT returns. Further, that the Respondent’s review established that the Appellant charged VAT on management fees only and not at the general rate on the gross invoice amounts. That as a result, the Respondent brought to charge the variances noted leading to the of issue of additional VAT assessments amounting to Kshs 28,743,241. 00 for the January 2021 and January 2022 review period.

35. The Respondent addressed the following grounds in opposing the Appellant’s Appeal:

Nature of the service supplied by Lead Human Capital to its clients 36. It was the Respondent’s case that the dispute herein was whether the Appellant ought to have charged VAT on the entire cost of labor and management fees or on management fees alone.

37. The Respondent asserted that a review of invoices presented by the Appellant established that VAT was only charged on management fees not on service fees ostensibly because service fees were reimbursements for salaries and statutory declarations paid by Coastal Bottler Limited to the Appellant. In addition, the Respondent asserted that the contract availed in support of service provision to Coastal Bottlers Limited could not be relied upon as it was entered for a period not under review since it bore the date of 1st March 2022, and that even that being the case, the contract would still not support the Appellant’s case regarding reimbursements.

38. The Respondent stated that the Appellant conceded and paid VAT for both employee salary and management fees with respect to its October 2023 returns yet the Appellant was disputing that VAT was not chargeable on cost of labor while relying on Section 13(5) of the VAT Act to justify its position regarding the contract with Coastal Bottlers Limited. A position that the Respondent challenged by asserting that Section 13(5) of the VAT Act did not envision cost of labour as reimbursement or disbursements. More specifically, the Respondent held that the contract between the Appellant and Coastal Bottlers Limited at Clause C described the Appellant as “providing various administration auxiliary support and factory undertaking and has at its disposal a wide range of facilities and suitably trained and competent personnel who can offer various services to the client.”

39. Further, that Clause D of the contract established a contractual relationship where the Appellant as the service provider would for consideration provide administrative services directly to the Coastal Bottlers Limited. That the same contract defined ‘personnel’ as “any person employed by or active in the organization, business or services of the service provider.” That Clause 8 of the contract provided charges and fees as follows:“i.The total management fee is Ksh 1,050 per month per employee.ii.Under clause 8. 1.2, Coastal Bottlers is to pay the Appellant costs necessary to cater for industrial relation activities meant to ensure industrial harmony among the Appellant’s employees deployed to work at Coastal Bottlers’ premises.iii.Under clause 8. 1.4 the Appellant maintains a “reimbursement account used to pay its staff.”

40. It was the Respondent’s assertion that the Appellant’s services to Coastal Bottlers Limited involved outsourcing of Appellant’s employees to Coastal Bottlers Limited at a fee and the said employees would then be paid by the Appellant.

Whether the services supplied by Lead Human Capital was Vatable 41. The Respondent stated that whereas Section 2 of the VAT Act defines ‘supply’ to mean “supply of goods or service and supply of services to mean anything done that is not a supply of goods or money including (a) the performance of services for another person; Section 5 of the VAT Act was the charging section for taable supply made by a registered person in Kenya.

42. The Respondent avowed that the services provided by the Appellant which were subject to dispute were not part of the listed exempt supplies under Part II of the First Schedule to the VAT Act thus Appellant’s services were vatable supplies under the VAT Act.

What was the consideration for the supply that should be subject to VAT 43. The Respondent averred that whereas Section 13(1) of the VAT Act provides that the taxable value of a supply is consideration for the supply, Section 13(3) of the VAT Act provides as follows:“(a)The amount in money paid or payable, directly or indirectly, by any person for the supply; or(b)…(c)Any taxes, duties, levies, fees, and charges (other than VAT) paid or payable on, or by reason of the supply.”

44. The Respondent averred that contrary to Section 13(5) of the VAT Act as cited by the Appellant, supply by the Appellant of labour in the nature of its employees as evidenced by invoices provided during the audit meant that the amount stipulated was made up of as cost labour plus management fees. Thus, the Appellant ought to have charged, collected and remitted VAT on the cost of labour paid as salaries and incidental costs to employees that had been outsourced to clients.

45. It was the Respondent’s assertion that Section 13(5) of the VAT Act was not applicable in the present case since it requires a taxpayer as the supplier to make a disbursement to a third party as an agent of his client yet in the present case the cost of labour was for employees and not Appellant’s clients’ employees and there was no way the Appellant could allege to have disbursed to itself the said cost of labour. The Respondent asserted that this cost was part of incidental costs incurred by the Appellant when offering taxable supply to its clients.

46. The Respondent claimed that the Appellant conceded to the above position when it made VAT returns for the month of October 2023 when the Appellant charged VAT on both items of employee salary and management fees. That the Respondent equally guided the Appellant as evidenced by various email communications.

47. It was the Respondent’s assertion that it mattered not how the Appellant drew invoices, maintained accounts, or described the consideration once the nature of taxable supply had been ascertained as what informed the determination of consideration for supply were the provisions of the VAT Act. Thus, the employees subject to taxable supply under dispute were employees of the Appellant not the Appellant’s clients since salaries could not be termed as disbursements within the meaning of Section 13(5) of the VAT Act. That this was because the Appellant availed its own employees to Coastal Bottlers Limited and could not then turn and claim to be an agent in the transaction as what was in dispute was labour outsourcing of the Appellant’s employees to its clients.

48. The Respondent asserted that incidental costs incurred by the Appellant in the supply of taxable supply in issue were not subject to reimbursement and the correct tax position was the one adopted by the Appellant for their October 2023 filing of VAT returns.

49. The Respondent stated that it duly communicated its assessment and objection decision as provided for in law wherein reasons for both were provided in accordance with provisions of the TPA. That it was the Appellant who was not keen to follow due process of objecting to assessment despite being indulged on several occasions on the need to formally object to the assessment and review findings.

Respondent’s Prayer 50. The Respondent made the following prayers:i.That the Tribunal dismisses the Appeal with costs.ii.That the Tribunal upholds the objection decision dated 15th December 2023.

Parties’ Written Submissions 51. The Appellant’s written submissions dated 30th July 2024 were filed on 1st August 2024, the same were adopted by the Tribunal on 11th September, 2024. The Appellant identified three issues for determination which it submitted on as hereinunder:

Whether the objection decision issued on 15th December 2023 contravened Section 51(11) of the TPA 52. The Appellant submitted that its labour costs which were disbursements were exempt under Section 13(5) of the VAT Act as it proved through the attached invoices and relevant contracts. It was the Appellant’s submission that upon its objection to the Respondent’s assessment on 22nd September 2023, the Respondent issued its objection decision on 15th December 2023 which was 84 days late contrary to Section 51(11) of the TPA which provides as follows:“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

53. The Appellant asserted that the Respondent ignored the objection of 22nd September 2023 yet it was the only one anchored in law and that the alleged advice or guidance by the Respondent for the Appellant to re-object and following the chronology of events was an attempt by the Respondent to cure the timeline issue. To buttress this position, the Appellant relied on the High Court decision in the case of Eastleigh Mall Limited vs Commissioner of Investigations and Enforcement Income Tax Appeal No. E068 of 2020 that;“14. On validity of the objection decision, the Tribunal observed that the reason for the late objection was due to the fact that the parties were engaged in discussions and it was guided by Article 159 of the Constitution to do substantive justice….

18. It is clear from the foregoing that the provisions of section 51(11) of the Tax Procedures Act are mandatory. They are not cosmetic. Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the taxpayer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

54. The Appellant insisted that the Respondent never rendered a decision on the objection of 22nd September 2023 and instead engaged the Appellant in correspondence on various dates leading to the issuance of the objection decision of 15th December 2023 the implication of which was that the Appellant’s objection was deemed allowed by operation of the law meaning the objection decision rendered by the Respondent was void. The Appellant buttressed this position by citing the Court holding in the case of Vivo Energy Kenya Limited v Commissioner of Customs and Border Control, Kenya Revenue Authority & Another[2020] where it was held that;“The provisions of the TPA are clear that where the Commissioner fails to make a decision on an objection within sixty days, the objection shall be allowed. This means that the objection dated 8th November 2016 in which the Appellant sought for revision of the Commissioner’s decision to demand the excise duty amounting to Kshs 127,183,363. 00 was allowed by operation of the law by dint of Section 51(11) of the TPA. Therefore, the 1st Respondent should not have continued to demand the payment of excise duty through letters dated 23rd November 2016, 3rd February 2017, 3rd October 2019, 24th October 2019 and 7th November 2019. All those demands amounted to nothing in law.”

Whether the disbursement: payroll costs and statutory costs were subject to VAT 55. The Appellant submitted that it entered into two-year renewable running contracts wherein it was contracted for services under consideration as specified in the contracts which were binding in terms and conditions to the parties. The Appellant issued management service which included administrative services and payroll management of client’s staff for consideration. In supporting this position that contracts could not be re-written, the Appellant relied on the following authorities: Kenya Pipeline Company Limited v Kenolkobil Limited (2013)eKLR

Nyutu Agrovet Limited v Airtel Networks Limited (2015)eKLR

National Bank of Kenya Limited v Pipeplastic Samkolit(K) Ltd & Anor (2001)eKLR

56. That contrary to Respondent’s use of the words ‘personnel’ and ‘employees’ interchangeably, the former refer to Appellant’s expert staff whereas the latter refer to laborers in question as used in the contract. The Appellant asserted that the Respondent failed to provide any explanation why the contract therein should be ignored and the disbursements brought to tax yet the Appellant fully accounted for taxes regarding management fees.

57. The Appellant submitted that Section 13(1) of the VAT Act provides that the taxable value of the service shall be the consideration for the supply and cited Clause 8 of the contract as providing for consideration for the service provider fees noting that at Clause 8. 1.4. 1 separated fees for the Appellant and reimbursements indicating that the two shall be in two distinct and separate accounts. The Clause further provided that the Appellant would receive management fees as the contract fee whereas the client would retain control of the reimbursement account.

58. The Appellant held that the reimbursed amounts were for meeting the cost of the clients with regard to statutory fees and labor costs and that in the contract at Clause 8. 1.4. 1, reimbursements was to ‘safeguard the client against any eventuality’ with the Appellant acting as an agent of its client therefore the Respondent had no legal basis to infer otherwise.

59. The Appellant was adamant that reimbursement was not subject to tax as provided for by Section 13(5) of the VAT Act and cited the holding in locus classicus case of Russel v Scott (1948) 2 ALL ER 5 that; “…there is a maxim of income tax law which, though it may sometimes be overstressed, yet ought not be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax on him”

60. The Appellant submitted that its client retained all control, dismissal, occupational and safety, supervision through contract manager of the employees thus was responsible for the employees not the Appellant as was being misinterpreted by the Respondent. The Appellant asserted that in providing invoices and contracts, it discharged its burden of proof and the Respondent could not merely indicate that reimbursements did not fall under Section 13(5) of the VAT Act without any legal backing.

Whether the Assessment issued contrary to Section 31(8) of the TPA was proper 61. The Appellant submitted that the Respondent’s assessment failed to comply with Section 31(8) of the TPA and was threatening with its immediacy as opposed to the thirty days given under statute and did not contain the manner of objecting which forced the Appellant to object immediately. It was the Appellant’s case that tax laws are strictly interpreted and that being the case, the Respondent’s non-compliance with Section 31(8) of the TPA meant the assessment was barred in law.

62. The Respondent’s written submissions dated 15th August 2024 were filed on 29th August 2024 and adopted by the Tribunal during the hearing on 11th September, 2024 wherein the Respondent submitted on following three issues that it had identified for determination:

Whether the Respondent’s objection decision of 15th December 2023 contravened Section 51(11) of the TPA. 63. The Respondent submitted that contrary to Appellant’s allegations, its objection decision complied with Section 51(11) of the TPA yet the Appellant was attempting to raise compliance issue in its submissions which had not been raised in its pleadings whereas the law has clearly stated that parties are bound by their pleadings. The Respondent buttressed this position by citing the following authorities: Dakianga Distributors (k) Limited v Kenya Seed Company Limited [2015]eKLR

HCCONNITA/E093/2023: Kenya Revenue Authority vs Ibangua Investments Co Limited

64. The Respondent asserted that whereas the Appellant’s objection was first lodged on 25th October 2023, the same was validated on 15th November 2023, and the Respondent’s objection decision was rendered on 15th December 2023 which according to the Respondent was the sixtieth day. The implication of which was that the Appellant’s argument was an afterthought and clutching at straws.

Whether the Respondent’s assessment was issued contrary to Section 31(8) of the TPA 65. The Respondent stated that its assessment was proper and that it was not a one-day event but a process and it was false for the Appellant to claim that their assessments was issued contrary to Section 31(8) of the TPA.

Whether the Appellant’s payroll costs were incidental costs and that part of taxable value of the supply in accordance with Section 13(5) of the VAT Act. 66. The Respondent asserted that Appellant’s ‘reimbursements’ were indeed incidental costs necessary for it to provide services which pursuant to Section 13(5) of the VAT Act were part of the taxable value of supply as cost of labour could not be termed as reimbursement under the cited section since even their contract which designated the Appellant as an agent entailed the claiming of all incidental costs incurred in the course of its agency duties.

67. The arrangement was termed by the Respondent as labour outsourcing of Appellant’s own employees at a fee and that being a contract of service, then there was an employer-employee relationship within the meaning of Section 2 of the Employment Act, CAP 226 of the Laws of Kenya (hereinafter “EA”). The Respondent supported this position by citing the Court holding in the case of Everret Aviation Limited v Kenya Revenue Authority(Through the Commissioner of Domestic Taxes)[2013]eKLR where the court discussed the parameters to consider when establishing whether there was a contract for service or contract of service.

68. The Respondent asserted the mere separation of invoices into two did not mean that ‘reimbursements’ were actually reimbursements and relied on the holding in Adeco vs HMRC(2018) where the Court in determining whether disbursement relating to labour was subject to VAT, first established whether there was supply in order to determine whom a supply was made. It was the Court’s finding that “workers” were the supply and the total value of supplies was what was charged to the contracting party. Analogous to the present case, the Appellant supplied “workers” to its client for consideration as stated in their contact.

69. The Respondent held that the Appellant’s supplied services were subject to VAT pursuant to Section 5 of the VAT Act and were not part of the listed exempt supplies under Part II of the First Schedule to the VAT Act. Further, that the consideration for supply by the Appellant of labour was the total amount paid pursuant to Section 13(5) of the TPA as evidenced by invoices adduced during the audit. Consequently, the Appellant ought to have charged, collected and remitted VAT on the cost of labour paid as salaries and incidental costs to employees that were outsourced to clients.

Issues For Determination 70. The Tribunal, before delving into the issue(s) that it has identified for determination wishes to note its observation that the Appellant herein annexed with its written submissions a document that bears similitude to a preliminary objection to the Respondent’s objection decision. In this purported preliminary objection, the Appellant has raised an objection that a ground of the objection decision dated 15th December 2023 was barred in law as the same was made after 84 days contrary to Section 51 (11) of TPA. Whereas this is a point of law that either party can bring up at any point of the Appeal, the Tribunal, frowns upon the furtive scheme of the Appellant in its attempt to bring this issue before the Tribunal through its written submissions. The Tribunal has nevertheless perused the correspondence and determined that this issue is frivolous and vexatious to the judicial process and the same will not be given consideration by the Tribunal at all.

71. The Tribunal has carefully considered the parties’ pleadings, documentation adduced as evidence and both parties’ written submissions and finds that this matter distils into the following single issue for determination:Whether the payments received by the Appellant for settlement of employment costs is subject to VAT.

Analysis And Findings 72. The Tribunal having established the issue for determination will proceed to analyze them as follows:

Whether the payments received by the Appellant for settlement of employment costs is subject to VAT. 73. The dispute herein arose from Respondent’s returns review on Appellant’s income tax return and the turnover in VAT for the period February 2020 to January 2022 resulting in a VAT assessment of Ksh 28,743,241. 00 as confirmed in the objection decision dated 15th December 2023.

74. The Tribunal’s view is that the crux of the matter is whether the consideration for services provided by the Appellant to its clients was partially or fully subject to VAT i.e. management fees and employee costs. The Appellant argued that the Respondent committed a legal and factual error by imposing VAT on its entire consideration as opposed to only charging VAT on management fees because employee costs were received on behalf of its employees and was subject to statutory deductions such as NSSF, NHIF and PAYE and that purporting to subject the same to VAT was akin to double taxation. On its part, the Respondent was categorical that the entire consideration received by the Appellant constituted ‘supply’ within the meaning of Section 2 of the VAT Act and was thus subject to VAT at the standard rate.

75. The Tribunal observes the Appellant’s opinion that the Respondent contravened Section 13 of the VAT Act as well as Section 31(8) of the TPA a position that was challenged by the Respondent who asserted that while it fully complied with Section 31(8) of the TPA, the Appellant could not be allowed to rely on Section 13(5) of the VAT as the section does not envision cost of labour as reimbursement or disbursements. At this juncture, the Tribunal associates with the holding in the case of Judicial Review 2 of 2016 Silver Chain Limited vs Commissioner Income Tax & 3 others (2016) eKLR where Chitembwe J held that;“Although the respondents are empowered by the law to assess what a taxpayer ought to pay, it is prudent that while undertaking such an exercise, the taxpayer be given an opportunity to explain its position”

76. The Tribunal notes that it was not in dispute that the Appellant was engaged in the business of supply of human resource services to its clients for a fee. The contention was whether the fee in question that is comprised of management fee and disbursements for employee costs was to be subjected to VAT fully or partially for the management fee only. It is clear that the demarcation of the two costs was necessary for tax purposes; specifically, because employee costs were subject to PAYE and taxing the same for VAT would be tantamount to double taxation. Accordingly, the Tribunal finds that only management fees was subject to VAT whereas employee costs were not as couched under Section 2 of the VAT Act.

77. The Tribunal observes that it is now settled that any tax paid must rest upon legal provisions and it is for this very reason that Parliament in its wisdom ensures that statute provides avenues and procedures for redress on taxes paid in error. The Respondent’s insistence that the Appellant’s payment for VAT returns filed in October 2023 in relation to employee’s salary and management fees was concession to taxes chargeable is not anchored on any written law. The Respondent ought to have corrected the anomaly instead of gleefully swelling taxes at the expense of the Appellant. The Tribunal reiterates the following Court holding in the case of Republic v Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] eKLR:“…payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obligated to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

78. The Tribunal having established that the Appellant herein provided services for a consideration in form of employee costs plus management fees, is of the firm view that delineation of the Appellant’s consideration was necessary for tax purposes and the Respondent as the taxing agent ought to have based its assessments on that basis. Accordingly, the Tribunal is convinced that the Respondent’s objection decision dated 15th December 2023 was neither justified nor proper in law and finds that the payments received by the Appellant for settlement of employment costs are not subject to VAT.

Final Decision 79. The upshot of the foregoing is that the Appeal herein is meritorious and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowedb.The Respondent’s objection decision dated 15th December 2023 be and is hereby set aside.c.Each party to bear its own costs.

80. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER