[2025] KETAT 58 (KLR)

Stratostaff E.A. Limited v Commissioner of Domestic Taxes (Tribunal Appeal E267 of 2024) [2025] KETAT 58 (KLR) (24 January 2025) (Judgment)

Neutral citation: [2025] KETAT 58 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E267 of 2024

E.N Wafula, Chair, G Ogaga & AK Kiprotich, Members

January 24, 2025

Between

Stratostaff E.A. Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya engaging in human resource services. Its principal activity is the provision of staff outsourcing services, management services, executive management services, executive recruitment and interim management services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent stated that it sent to the Appellant a notice of intention to carry out an assessment in a letter dated 20th July 2022.

4. The Respondent issued to the Appellant its assessment notice and tax demand for Pay As You Earn (PAYE) and Value Added Tax (VAT) for the period 2018 to 2021.

5. On 30th November 2023, the Appellant objected to the additional assessments, and the Respondent issued an Objection decision on 24th January 2024 rejecting the Appellant’s Objection.

6. The Appellant, being dissatisfied with the Respondent’s Objection decision, filed its Notice of Appeal on 21st February 2024.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated and filed on 5th March 2024 which raised the following grounds: -a.That the Respondent erred in fact and in law by charging Pay As You Earn (PAYE) on consulting fees which had been rightfully subjected to withholding tax and in subsequently computing PAYE liabilities/taxes of Kshs. 6,004,800. 00 on the consultancy payments.b.That the Respondent erred in fact and in law by charging VAT liabilities of Kshs. 342,804,275. 32 on reimbursements which include employee salaries fees which related to outsourcing services.c.That the Respondent erred in fact by ignoring the practical application of outsourcing arrangements where the customer reimburses employee related costs at cost to the company offering outsourcing services.d.That the Respondent erred in fact by ignoring that the commissions and management fees from a separate and distinct line item that is chargeable to VAT in the sample outsourcing agreements provided.e.That the Respondent erred in fact and in law by disregarding that the funds reimbursed to the Appellant facilitate the payment of the staff costs and related statutory deductions on behalf of its customers when they fall due.f.That the Respondent erred in fact and in law by charging VAT on staff outsourcing costs yet there is no value addition to the payment and recovery of monies by the Appellant.g.That the Respondent erred in fact and in law by not taking cognizance of the act that staff outsourcing costs do not constitute a taxable supply as defined in Section 2 of the VAT Act.h.That the Respondent erred in fact and in law by interpreting the VAT Act and other tax laws in seclusion by stating that labour contracts are neither listed in the First or Second Schedule to the VAT Act and are therefore neither zero rated nor exempt, therefore, subjecting them to VAT at the standard rate.i.That the Respondent erred in fact and in law by ignoring the principle of substance over form of a transaction by stating that VAT should be charged on the full invoice amount.j.That the Respondent erred in fact and in law by charging VAT on costs such as payroll costs, NSSF, NHIF and other employee related statutory deductions which are reimbursed costs.k.That the Respondent erred in fact and in law by charging VAT on staff outsourcing costs which have already been charged PAYE resulting in double taxation of the same monies.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal:a.The Appellant’s Statement of Facts dated and filed on 5th April 2024;b.The Witness Statement of Antony Sisuma Lunalo dated 30th July 2024, and filed on 31st July 2024 that was admitted by the Tribunal in evidence under oath on 10th September 2024;c.Its Written Submissions dated and filed on 24th September 2024; andd.Its supplementary Written Submissions dated and filed on 24th October 2024.

9. The Appellant stated that it provides the following labour market services:a.Services for matching offers of and applications for employment, without the private employment agency becoming a party to the employment relationships which may arise therefrom (‘Recruitment Services’).b.Services consisting of employing workers with a view to making them available to a third party who may be a natural or legal person which assigns their tasks and supervises the execution of these tasks (‘Outsourcing Services’); andc.Other labour services such as:i.Temporary and casual staffing – The Appellant provides clients with the requisite staff at the right level and time for their routine or specialized needs. Thus, catering to the client’s unique business staffing requirements tailored for their specific industries in manufacturing, logistics, retail, or commercial sectors among others;ii.Project staffing - This involves sourcing and recruiting staff who will meet different project needs and seasonal requirements to match the growth, operational or business cycle needs. Therefore, the Appellant offers customized staffing solutions designed to meet the project needs, whether short-term or long-term; andiii.HR managed services - Taking care of the day-to-day Human Resource functional tasks that take up a company’s valuable time, thereby freeing up the in-house HR and administration so that the company can focus on its core business activities.

10. That making reference to its notice of intention to carry out a returns review dated 20th July 2022, the Respondent subsequently issued an assessment notice/demand for taxes totaling Kshs. 352,545,189. 96 on 1st November 2023 covering the period 2018 to 2021.

11. The Appellant stated that the letter highlighted three issues of contention. That firstly, the Respondent noted variances between monthly Income tax Pay As You Earn (PAYE) declarations (P10’s) and the salary and wages expensed in the Appellant’s financials. That for the financial years 2019 and 2020 there was consultancy fees expensed. That the Respondent deemed the amount as salary and wages and computed a PAYE liability of Kshs. 6,004,800. 00.

12. That secondly, the Respondent highlighted that there are some variances between the sales declared for Value Added Tax (VAT) and those in the Corporate income tax returns for the period 2018 to 2021. That this was broken down into two issues, that is, disallowing expenses amounting to Kshs. 7,353,015. 45 for the year 2018 thus reducing the Corporate tax credit from Kshs. 3,044. 733. 99 to Kshs. 838,829. 35, and charging VAT on variances amounting to Kshs. 3,736,114. 64 for 2019 to 2021.

13. That thirdly, the Respondent highlighted that the Appellant did not charge VAT on the full amounts of invoices levied to its clients but separated the amounts for staff outsourcing, that is, reimbursements and treated the sales transactions as exempt sales. That the Respondent proceeded to charge VAT and demand taxes amounting to Kshs. 342,804,275. 32.

14. The Appellant stated that on 30th November 2023, it objected to the assessment order above and provided explanations and supporting documents on the matters above.

15. That in its Objection, the Appellant explained to the Respondent the labour services were in accordance with the International Labour Organization (ILO) Convention No. 181, Private Employment Agencies Convention, 1997.

16. That with regard to variances relating to staff costs, the first issue of contention, the Appellant stated that the variances related to consultancy fees which were rightfully subjected to Withholding tax (WHT).

17. The Appellant presented its argument by firstly delineating the distinction between a consultant and an employee. That secondly, the Appellant pointed out the lack of a credible verification process by the Respondent to discern whether individuals receiving consultancy fees during the 2019 and 2020 fiscal years were employees or independent contractors/consultants, thereby hastily concluding that the unverified consultancy fee was not disbursed to the Appellant’s consultants despite an existing contract with the consultant which the Appellant attached herein as Appendix III in its bundle of documents.

18. That finally, to substantiate its assertion that consultancy fees amounting to Kshs. 14,400,000. 00 were indeed paid to its consultants, the Appellant provided a detailed schedule of the consultancy fees to the Respondent. That additionally, it included WHT certificates totaling Kshs. 2,927,807. 98, which are both appended as Appendix IV.

19. In its Objection regarding the second issue of contention, unreconciled VAT amounts relating to non-vatable items, the Appellant stated that it performed a reconciliation of the gross turnover as per the monthly VAT returns vis-à-vis the turnover costs as per the financial statements for the audited period. That this reconciliation, attached herein as Appendix V, was then shared with the Respondent for the Respondent’s review.

20. The Appellant stated that the reconciliation contained three elements justifying why the tax charged of Kshs. 3,736,114. 64 was erroneous in its entirety. That the first element addressed expenses reimbursement, wherein the Appellant clarified that the discrepancy related to reimbursements for various expenses such as, phone data expenses and medical cover. That these expenses are not subject to VAT as per Section 13(5) of the VAT Act which states: -“In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client; andProvided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

21. The Appellant further stated that the second element explaining the variance was an erroneous declaration of non-vatable items in the VAT 3 returns. That examples of the items included clients’ deposits and salary reimbursements which fall under the ambit of Section 13(5) of the VAT Act. That to facilitate a thorough review, the Appellant included a detailed breakdown of these items, highlighted in Appendix V.

22. That the third and last element contributing to the variance was zero rated services not declared in the VAT 3 returns. The Appellant explained that these included items appearing under management and administration fee which were exported services. The Appellant further clarified that there was no loss of revenue to the Respondent as exported services were zero rated for VAT purposes under the review period.

23. On the third and most critical issue of contention according to the Appellant, VAT charged on outsourced services, the Appellant maintained the position that these were mere reimbursements and the VAT amount of Kshs. 342,804. 275. 32 charged by the Respondent ought not have been charged. The Appellant argued that reimbursements are clearly excluded from VAT as provided for under Section 13(5) of the VAT Act.

24. The Appellant addressed the following components in demonstrating the nature of services it rendered and the reason why the amount the Respondent seeks to charge VAT is not a supply as it constitutes a reimbursement. That these key components, discussed in detail in the Appellant’s Objection included: -I.The nature of outsourcing arrangements;Ii.Practical application of outsourcing arrangements;Iii.Accounting treatment of outsourcing arrangements.Iv.The purpose and application of VAT.V.Definition of a taxable supply in the context of labour contracts.Vi.Exclusion of labour contracts from definition of a taxable supply.Vii.Substance over form in transactions.Viii.Taxable threshold for management fees.Ix.The definition of disbursements.

25. That based on the first component above, the Appellant made reference to the ILO Convention No. 181, Private Employment Agencies Convention, 1997 since there is no Act of Parliament that explicitly defines outsourcing in Kenya.

26. The Appellant additionally referred to the definition of "outsourcing" defined in the case of Abyssinia lron & Steel Limited V. Kenya Engineering Workers Union (2016] eKLR as follows: -“The contracting or subcontracting of noncore activities to free up cash, personnel, time, and facilities for activities in which a company holds competitive advantage. Companies having strengths in other areas may contract out data processing, legal, manufacturing, marketing, payroll accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost. Outsourcing is often an integral part of downsizing or reengineering. Also called contracting out.”

27. The Appellant asserted that it demonstrated that outsourcing services is considered a legitimate business model as held by the Court of Appeal in Kenya Airways Limited V. Aviation & AIlied Workers Union Kenya & 3 others [2014] eKLR as follows: -“Outsourced services is one such widely accepted business concept, which enables a company to focus on core business, reduce overheads, increase cost and efficiency savings, and manage cyclical resource demands. It is not designed to deprive Kenyans of their jobs.”

28. That the second component, practical application of outsourcing arrangements, highlighted the Appellant’s outsourcing business model within the East African Market. The Appellant stated that it submitted sample agreements attached as Appendix VII to the Respondent which prescribed the nature of services to be performed, duties and responsibilities of each party, salary for the staff and commissions/management fees to be charged.

29. That in the third component, accounting treatment of outsourcing arrangements, the Appellant stated that outsourcing costs such as those initially incurred by the Appellant on behalf of its customers were subsequently reimbursed as follows:Particulars Accounting treatment

Staff resourcing costs Dr: Cost of salesCr: Sales/Turnover

30. The Appellant added that through its outsourcing arrangements:a.It facilitates the payment of the staff costs and related statutory deductions on behalf of its customers when they fall due;b.it issues an invoice for payment of the staff costs and related statutory deductions, along with its management fees. That VAT is only charged on the management fees; andc.it recovers the staff costs and related statutory deductions from the customer’s payment and these amounts are declared as reimbursement not subject to VAT.

31. The Appellant, in explaining its fourth component of the purpose and application of VAT, referred to the International VAT/GST guidelines which set out the overarching purpose of VAT and the central design feature of VAT. That the Appellant noted that from the foregoing guidelines, is evident that VAT is levied directly on consumption, on an accounts-based measure of value added whereby "value added" is defined as the additional features or economic value that a company adds to its products and services before offering them to customers.

32. The Appellant reiterated that a mere payment and recovery of monies on a shilling-by-shilling basis did not create any value addition whatsoever. That the value addition is rather on the management of the outsourced staff, whereby a management fee is charged and attracts a VAT charge.

33. That under the fifth component, definition of a taxable supply in the context of labour contracts, the Appellant referenced the VAT Act which states that VAT is charged by reference to a taxable supply made by a registered person in Kenya, the importation of taxable goods and a supply of imported taxable services.

34. The Appellant further referred to Section 2 of the VAT Act which defines supply of services as: -“anything done that is not a supply of goods or money including:a)the performance of services for another personb)the grant, assignment, or surrender of any rightc)the making available of any facility or advantaged)the toleration of any situation or the refraining from the doing of any act.”

35. The Appellant noted that based on the definition of "taxable supply" above, the transfer of money does not constitute a supply of services. That the staff outsourcing costs recoveries constitute a transfer of monies relating to salaries and wages and other statutory deductions, and the supply of services by the Appellant is only the management and recruitment services.

36. The Appellant stated that it provided sample copies of bank statements to the Respondent, appropriately highlighting the fact that the monies received from clients were paid out as salaries and statutory deductions and that the Appellant did not make any additional money other than amounts billed as management fees.

37. The Appellant further stated that while the Respondent’s assessment noted that labour contracts are neither listed in the First or Second Schedule to the VAT Act and are therefore neither zero rated nor exempt, they such should not be subject to VAT.

38. The Appellant added that while the VAT Act operates an exclusion mechanism, this does not necessarily imply that if a transaction is neither listed in the First nor Second schedules, it automatically qualifies to be standard rated. The Appellant concluded the sixth component, exclusion of labour contracts from definition of a taxable supply, by stating that it is incumbent upon the Respondent to interpret the VAT Act and other tax laws wholesomely and not in seclusion.

39. The Appellant discussed the seventh component, substance over form of a transaction, with regard to the Respondent’s reliance on the provisions of Section 13 of the VAT Act in arriving at a ruling that VAT should be charged on the full invoice amount. The Appellant referred to the case of Kenmir v Frizzell |1968] 7 WLR 329, (the Kenmir Case) and Robinson Family Ltd v Revenue & Customs (2012/ UKFTT 360 (TC) (29 May 2012) (the Robinson Family case) at the First-Tier Tribunal (the Tax Chamber) to emphasize the importance of assessing the substance over form of a transaction.

40. That based on the case law above, the Respondent should appreciate the substance of a transaction in its totality and the underlying transactions in determining the VAT status. That in its case, the underlying staff outsourcing expenses on which the Appellant did not charge VAT incurred by the Appellant are made up of salaries, wages and other statutory deductions such as NSSF, NHIF and NITA. That these expenses are outrightly out of scope for VAT and as such no VAT assessments should be charged on these amounts.

41. The Appellant stated that in its case, customers assign and supervise the outsourced staff members’ work and are ultimately responsible for them. That the Appellant, merely facilitates the provision of the outsourcing staff, and its income is that of management fees only.

42. The Appellant pleaded that it is merely acting as agent in the payment of the payroll costs and its income should solely be that of management fee only. That as an agent, any disbursement incurred on behalf of a client should be out of scope for VAT purposes.

43. The Appellant relied on the case of Preferred Personnel Vs Commissioner of Domestic Taxes I149 of 2022, wherein the Tribunal, in detail clearly addressed the matter and held that: -“As a result of the foregoing, the Tribunal finds that the payments made to the Appellant for reimbursement of employee-related costs are not vatable as they constitute reimbursements of employee salaries and emoluments and therefore not chargeable to VAT. Consequently, the Tribunal finds that the Respondent was not justified in raising the VAT assessment on the total pay received by the Appellant from its clients as only VAT on the service element was taxable and this was accounted for by the Appellant.”

44. The Appellant defined the term "disbursement" in the ninth ambit relying on Section 13(5) of the VAT Act. The Appellant argued that since the VAT Act does not define what constitutes an incidental cost and what requirements are to be considered for a transaction to qualify as a disbursement and therefore excluded from the taxable value of a supply, the Appellant relied on the guidance from other jurisdictions whose legislation has persuasive influence in Kenya, in this case, from the United Kingdom where, His Majesty’s Revenue & Customs (HMRC), defines a disbursement as a payment made to suppliers on behalf of customers if you pass the cost to the customer when you invoice them.

45. The Appellant averred that the Regulations further state that such costs ought to be excluded from the value for VAT purposes because it is the customer, not you who buys and receives the goods or services, and you are just acting as their agent.

46. The Appellant then listed the following conditions which according to it, must apply to treat an expense as a disbursement: -a.You paid the supplier on your customer’s behalf and acted as the agent of your customer.b.Your customer received, used or had the benefit of the goods or services you paid for on their behalf.c.It was your customer’s responsibility to pay for the goods or services, not yours.d.You had permission from your customer to make the payment.e.Your customer knew that the goods or services were from another supplier, not from you.f.You show the costs separately on your invoice.g.You pass on the exact amount of each cost to your customer when you invoice them.h.The goods and services you paid for are in addition to the cost of your own services.

47. That based on the conditions above, the Appellant stated that it merely acted as an agent of its customers and made the payments as per their contracts. That the exact amounts were subsequently passed on to its customers, and accounted for shilling by shilling as demonstrated in the shared bank statement analysis.

48. That additionally, the Appellant’s customers were the ultimate beneficiaries of the labour supplied and not the Appellant as the Appellant received no service from the outsourced employees. That the employees were directly placed at its customers’ premises and the staff benefited and contributed to its customers’ increased revenues.

49. The Appellant averred that the transaction agreement between itself and its customers expressly provides that it is the customer’s responsibility to pay for the services and not the Appellant’s. That the Appellant only remitted the amounts to comply with the Kenyan labour and tax laws. That in addition, the agreements expressly authorize the Appellant to make the payment on its customers’ behalf. That moreover, the Appellant separately showed the costs on its invoices, distinguishing between staff outsourcing costs and the management fees which it shared with the Respondent and enclosed copies of invoices.

50. The Appellant submitted that amounts received as repayment of expenditure on behalf of a customer constitute a disbursement and should therefore be out of scope for VAT purposes. It relied on the holdings in the following two cases in support of its submission:a.British Airways v J. Prosser [2019] EWCA Civ 547; andb.Brabners LLP v HMRC [2017] UKFTT TC06093.

51. The Appellant stated that the imposition of VAT and PAYE on salaries and wages amounts to double taxation which is unconstitutional. That not only is this treatment unconstitutional and unlawful, but the same is also contrary to the principals of taxation and economically punitive in nature the Appellant. That subjecting VAT on the disbursements will increase the Appellant’s cost of doing business and make the business unattractive to customers. That this will be contrary to the Government of Kenya’s goal to facilitate trade.

52. The Appellant further stated that it concluded its Objection by asserting that levying of additional VAT assessment of Kshs. 352,545,189. 96 by the Respondent will cause undue economic hardship and adversely affect the economy in that some of its employees would be declared redundant and ultimately, the business might have to shut down due to lack of funds to pay such a huge inaccurate assessment.

53. The Appellant’s witness reiterated the Appellant’s grounds of appeal and arguments as presented in the Appellant’s Memorandum of Appeal and Statement of Facts.

Appellant’s prayers 54. The Appellant prayed for the following orders:a.That the demand of taxes of Kshs. 352,545,189. 96 be declared null and void and be vacated in its entirety.b.That the Respondent be restrained from enforcing their demand of any and all assessed taxes arising under the demand from the Appellant.c.That the Respondent’s action to demand additional taxes despite logical and cogent explanations being given to it be declared arbitrary, unreasonable, unfair and contrary to the administration of justice of a taxpayer, and that the same should be set aside.d.That the Appeal be allowed with costs to the Appellant.e.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case 55. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 4th April 2024 and filed on 5th April 2024;b.The Witness Statement of Moses Ndirangu dated 9th August 2024 and filed on 12th August 2024 that was admitted by the Tribunal in evidence under oath on 10th September 2024;c.Its Written Submissions dated 12th September 2024; andd.Its supplementary Written Submissions dated 23rd October 2024.

56. The Respondent stated that it sent a notice of intention to carry out an assessment on the Appellant’s accounts on 20th July 2022. That the Respondent conducted a review into the Appellant’s tax affairs to ascertain its tax liability in relation to VAT and PAYE.

57. The Respondent stated that it established variances between the PAYE declarations under the PAYE monthly returns vis-à-vis the salary and wages expensed in the Appellant’s financial statements.

58. That the Respondent proceeded to issue an assessment notice for PAYE and VAT dated 1st November 2023 for the period 2018 to 2021, which the Appellant herein lodged its notice of objection dated 30th November 2023 challenging the assessments in their entirety.

59. The Respondent affirmed that it proceeded to consider the grounds of Objection and eventually issued the Objection decision on 24th January 2024 herein appealed by the Appellant vide Notice of Appeal filed on 21st February 2024 and the Memorandum of Appeal together with the attendant documents filed on 5th March 2024.

60. The Respondent asserted that it reiterates the position as outlined in its Objection decision dated 24th January 2024.

61. The Respondent reiterated the Appellant’s contention that the Respondent erred in charging PAYE on consulting fee which had already been subjected to Withholding tax (WHT). In response to this ground of appeal, the Respondent averred that the Appellant did not attach any document to prove that there was a consultancy agreement between the Appellant and Abraham Weldu whose details are borne in the withholding certificates.

62. The Respondent averred that the consultancy contract ought to have been supported by invoices issued by Abraham Weldu detailing the service rendered. That in the absence of the written contract, it was difficult for the Respondent to make a determination if Abraham Weldu was an employee or a consultant, as suggested by the Appellant.

63. That further, if indeed Abraham Weldu was a consultant as alleged by the Appellant, the withholding certificates provided to the Respondent during the objection stage did not add up to Kshs. 2,927,807. 98. That the 20 entries of WHT details in the schedule of WHT provided to it by the Appellant during the objection stage added up to a total of Kshs. 1,716,826. 00.

64. The Respondent further averred that even after perusal of the withholding certificates provided by the Appellant in its Appeal bundle, they amount to 24 whilst the ones listed in the schedule in the Appeal amount to 34. That however, the Appellant provided the Respondent with 20 withholding certificates. That this demonstrates the following:a.That the Appellant did not provide all the withholding certificates during the Objection stage.b.That the Appellant irregularly introduced additional withholding certificates at the Appeal stage without leave of the Tax Appeals Tribunal. That this means that the Respondent did not have a look at them before arriving at the Objection decision.

65. The Respondent further averred that without prejudice to the foregoing, it would still assess the remainder in WHT, that is, the difference between Kshs. 2. 927,807. 98 and Kshs. 1,718,826. 00. That the basis of this charge is hinged on Section 35(3) of the Income Tax Act which provides as follows regarding deduction of WHT in respect of management or professional services fees: -“(3)Subject to subsection (3A), a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of: -(f)management or professional fee or training fees the aggregate value of which is twenty-four thousand shillings or more in a month. ...which is chargeable to tax, deduct therefrom tax at the appropriate resident withholding tax.”

66. The Respondent referred to Section 2 of the Income Tax Act which defines management or professional fees to mean: -“payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, contractual, professional or consulting services however calculated…”

67. The Respondent asserted that the Appellant did not adduce any proof to demonstrate that Abraham Weldu was paid Kshs. 11,520,000. 00 (amount net of WHT). The Respondent averred that it was its expectation that such amounts were paid to the bank account and this would be supported by the invoice issued by him.

68. The Respondent submitted that Section 56(1) of the Tax Procedures Act provides that the burden shall be on the Appellant to prove that a tax decision is incorrect thus, the Appellant herein is obligated to prove that the Respondent’s assessment is wrong by providing consultancy contracts and the related invoices.

69. In response to grounds 2-10 of the Appeal, the Respondent reiterated the Appellant’s contention that the Respondent erred in charging VAT on reimbursements which included employee salaries related to outsourcing services.

70. The Respondent averred that for the year 2018, the variance was subject to Income tax after being added back in the tax computation thus increasing the Income tax liability and thus reducing the Corporation tax credit to Kshs. 838,839.

71. That for years 2019 to 2021, upon review of the documentations provided, the Respondent established the following:a.That the Appellant did not provide a breakdown of the invoices as declared in the Income tax returns (showing invoice number, invoice amount, invoice date, customer name. description of service offered).b.That the Appellant did not provide a breakdown of the invoices as declared in the VAT returns (showing invoice number, invoice amount, invoice date, customer name, description of service offered).c.That the provision of the above invoices would have enabled it to identify the specific invoice(s) that caused the variance(s).d.That upon isolation of the invoice(s), the Respondent would have delved into whether the items in the identified invoices have any VAT implications.

72. The Respondent averred that the Appellant split the invoices into 2 components - management fees and salaries & wages. That the salaries and wages component was treated as exempt sales and therefore not charged to VAT since it constitutes disbursements pursuant to Section 13(5) of the VAT Act. The Respondent affirmed that it disagreed with this kind of arrangement and charged VAT on the same.

73. The Respondent reiterated the Appellant’s explanation that employees’ costs should be treated as disbursements and thus not subject to VAT. That however, the Respondent averred that upon review of the detailed grounds of Objection, together with the adduced evidence, it was noted as follows:a.That the Appellant failed to provide employment contracts of the purported outsourced employees to demonstrate that the same were not the Appellant’s employees.b.That the contracts of employment would have demonstrated if the said employees were employed by Appellant’s clients, thus a reimbursement of the expenses.

74. That however, the Respondent established that the employees in question are employees of the Appellant and thus when the Appellant makes payment of salaries and wages, it is doing the same as the principal and not an agent of its clients. That this is evidenced in the fact that the Appellant deducted and paid all statutory deductions.

75. The Respondent averred that the service offered to the Appellant’s client cannot be broken down into the different components that go into offering the service and charged differently for VAT purposes.

76. In response to ground 11 of the Appeal, the Respondent averred that the Appellant is misinterpreting VAT and Income tax wrongly and the two acts are independent of each other.

77. The Respondent argued that Section 13 VAT Act clearly shows what constitutes a taxable supply.

78. That Section 3 as read together with 37 of Income Tax Act states that gains from employment are subject to Income tax.

79. It was the Respondent’s submission that the charging of PAYE on salaries and wages does not exclude a service being subject to VAT as the determination of the value of that particular service offered through employees will constitute the cost incurred (such as employment costs, printing, computer costs, etc.) plus a margin for the Appellant.

80. The Respondent submitted that Section 13 of the VAT Act only excludes reimbursement of costs and the Appellant has not demonstrated using contracts of service that the said employees were employed by the Appellant’s client for the same to fall under reimbursements.

81. The Respondent’s witness reiterated the Respondent’s responses to the Appellant’s Memorandum of Appeal as covered in the Respondent’s Statement of Facts.

82. The Respondent submitted that it followed due procedure before issuing its Objection decision and it therefore ought to be upheld.

83. The Respondent finally submitted that the Appellant has not discharged its burden of proof as required by Section 56(1) of the Tax Procedures Act as read with Section 30 of the Tax Appeals Tribunal Act.

Respondent’s prayers 84. The Respondent prayed that the Tribunal finds: -a.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.b.That the Objection decision dated 24th January 2024 be upheld and the taxes be deemed due and collectible.

Issues For Determination 85. The parties on the 30th April, 2024 reached a part compromise on the tax dispute before the Tribunal, and which compromise precipitated in the execution of a Partial Consent dated and filed on the 24th May, 2024, that was endorsed as a Part Judgment of the Tribunal on the 11th July, 2024.

86. In pursuant to the Partial Consent the dispute as relates to PAYE assessment was determined and parties agreed to refer the remaining dispute as relates to VAT assessment back to the Tribunal for determination.

87. The Tribunal in due appreciation of the purport of the Partial Consent and upon consideration of the facts of the matter and the submissions made by the parties, is of the view that the issues falling for its determination are as follows:a.Whether the Respondent was justified in issuing Value Added Tax (VAT) assessments on turnover variances for the years 2019, 2020 and 2021. b.Whether the Respondent was justified in issuing Value Added Tax (VAT) assessments on salaries, wages and other employment costs relating to employee outsourcing services for the years 2018, 2019, 2020 and 2021.

Analysis And Findings 88. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings and evidence adduced by both the Appellant and the Respondent concerning the impugned Objection decision.

a. Whether the Respondent was justified in issuing the VAT assessments on turnover variances for the years 2019, 2020 and 2021. 89. The Respondent stated that it established variances between the sales declared in the VAT and Corporation tax returns for the years 2019, 2020 and 2021 and charged VAT at 16%. The Respondent confirmed the assessment citing that the Appellant did not support its explanations of the variances provided during the Objection stage resulting in a limitation of scope by the Respondent on this issue.

90. The Appellant asserted that it performed a reconciliation, which it shared with the Respondent, of the gross turnover as per the monthly VAT returns vis-à-vis the turnover costs as per the financial statements for the audited period.

91. That the reconciliation contained three elements justifying why the tax charged of Kshs. 3,736,114. 64 was erroneous in its entirety:a.Expenses reimbursement, wherein the Appellant clarified that the discrepancy related to reimbursements for various expenses such as phone data expenses and medical cover. That these expenses are not subject to VAT as per Section 13(5) of the VAT Act.b.An erroneous declaration of non-vatable items in the VAT 3 returns including clients’ deposits and salary reimbursements which fall under the ambit of Section 13(5) of the VAT Act.c.Zero rated services not declared in the VAT 3 returns. The Appellant explained that these included items appearing under management and administration fee which were exported services. The Appellant further clarified that there was no loss of revenue to the Respondent as exported services were zero rated for VAT purposes under the review period.

92. The Tribunal reviewed the Appellant’s arguments and the reconciliation it adduced as evidence to determine their sufficiency in proving that the Respondent’s assessments were erroneous.

93. The Tribunal notes that the Appellant presented the same reconciliation schedule that it presented to the Respondent, and no further supporting documents in respect of its explanations of variances listed above which the Appellant further enumerated in its reconciliation.

94. The Tribunal observes that the Appellant’s explanations of the turnover variances were expense reimbursements and exported services, yet the Appellant did not provide any documents to support the amounts claimed.

95. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly place a burden on the Appellant to prove that the Respondent’s additional assessments of VAT were incorrect or excessive.

96. The Tribunal refers to Section 43 of the VAT Act which provides that a person carrying on a business must keep certain records and documents and avail the same to the Commissioner for inspection, as follows: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein...”

97. Regulation 13 of the Value Added Tax Regulations, 2017 provides as follows regarding exportation of services and documentation for proof of exportation of services: -“13. (1)An exportation shall be a taxable supply-(a)in the case of goods, when the taxable supply involves the goods being entered for export under the East African Community Customs Management Act and delivered to a recipient outside Kenya at an address outside Kenya; or(b)in the case of services, when the taxable supply involves the services being provided to a recipient outside Kenya for use, consumption, or enjoyment outside Kenya.Provided that the exportation of services shall not include-(a)taxable services consumed on exportation of goods unless the services are in relation to transportation of goods which terminates outside Kenya ;(b)taxable services provided in Kenya but paid for by a person who is not a resident in Kenya.

(2)The documentation relating to a supply required as the proof of an exportation of goods or services shall be-(a)a copy of the invoice showing the recipient of the supply to be a person outside Kenya;(b)proof of payment for the supply;c)for goods, a copy of—(i)the bill of lading, road manifest, or airway bill, as the case may be;(ii)the export or transfer entry certified by a proper officer of Customs at the port of exit;(iii)for excisable goods, the documents shall be in accordance with the provisions of the Excise Duty Act (Cap. 472).(d)for services, such other documents as the Commissioner may require as proof that the services had been used or consumed outside Kenya.”

98. The Appellant, however, did not adduce as evidence in this Appeal any of the relevant documents that it is required to keep under Section 43 of the VAT Act, Regulation 13 of the Value Added Tax Regulations, 2017 and Section 23(1) of the Tax Procedures Act for the ascertainment of its tax liability and to support its arguments.

99. Consequently, the Tribunal finds that due to the Appellant’s failure to discharge its burden of proof, the Respondent was justified in assessing VAT for the years 2019, 2020 and 2021 on unsupported turnover variances.

b. Whether the Respondent was justified in issuing Value Added Tax (VAT) assessments on salaries, wages and other employment costs relating to employee outsourcing services for the years 2018, 2019, 2020 and 2021. 100. The Respondent charged VAT, at the general rate, on salaries, wages and other employment costs relating to employee outsourcing services for the years 2018, 2019, 2020 and 2021 by relying on its interpretation of Section 13 of the VAT Act.

101. The Appellant maintained the position that the salaries, wages and other employment costs, which the Appellant treated as exempt supplies in its VAT declarations, were mere reimbursements and the VAT amount charged by the Appellant ought not have been charged. The Appellant argued that reimbursements are excluded from VAT as provided for under Section 13(5) of the VAT Act.

102. The Tribunal has analysed the applicable law and the parties’ arguments and evidence to establish the correct position regarding the VAT treatment of salaries, wages and other employment costs related to the employee outsourcing services which the Appellant supplies.

103. The Tribunal has reviewed all the five contracts between the Appellant and its clients that the Appellant adduced as evidence and summarizes below the salient features of each regarding the scope of services, the supervision terms and the remuneration terms in respect of employee outsourcing services provided in the years 2018, 2019, 2020 and 2021:a.Airflo Limited and Stratostaff EA Limited – the date of the Agreement was 1st August 2022 therefore the Tribunal did not consider the details of the Agreement as the Agreement period is outside the years assessed by the Respondent.b.Bamburi Cement Plc and Stratostaff EA Limited – the date of the Agreement was 1st January 2023 therefore the Tribunal did not consider the details of the agreement as the Agreement period is outside the years assessed by the Respondent.c.Beiersdorf East Africa Limited and Stratostaff EA Limited – the date of the Agreement was 16th December 2021. The Agreement states in Clauses 4. 1, 4. 2 and 6 that:i.The Appellant shall make available to the client personnel suitable for the client’s requirements for the duration of the agreement.ii.The Appellant shall advise each of its employees prior to the assignment to the client that they are employed by the Appellant and not the client. That it is hereby agreed and understood by the parties that the employees shall at no time be regarded as employees of the client.iii.The Appellant shall remunerate each of the employees assigned to the client at the rate agreed between the Appellant and the employee, which rate shall be communicated to the client for approval before appointment.iv.The Appellant shall employ such supervisors as may be required who shall be in charge of ensuring that the client needs are met through the employees. The supervisor(s) shall in consultation with a manager of the client and throughout the duration of the Agreement exercise all supervision, direction and control over the manner, time and place in which each employee carries out their work for the client.v.The Appellant shall manage leave of its employees.vi.The Appellant shall conduct regular performance reviews and conduct performance improvement coaching where necessary, in consultation with the client.vii.The Appellant shall keep accurate and up to date records of all employees engaged at the client and shall share such data and employee records with the client whenever the client requests. Such records include employment letters, pay slips, payroll, leave, days off, attendance, etc.viii.The client shall provide a manager and or supervisor or such other personnel who shall form the link between the Appellant and the client and who shall ensure that the Appellant’s appointed supervisor carries on all supervision, direction and control over the manner, time and place in which each employee carries out their work for the client in accordance with the client needs.ix.The management fee on employment costs shall be 10% (ten percent) of the employment cost calculated.

104. Kuehne+Nagel Kenya Limited and Stratostaff EA Limited – the effective date of the Agreement was 1st October 2017. The Agreement states in Clauses 5 and 6, and Schedule 1 that:i.The scope of services to be performed include provision of temporary personnel.ii.The Appellant shall be responsible for ensuring that the client shall not at any time be considered the employer of the Appellant’s personnel.iii.The Appellant shall have sole responsibility for the conduct of its personnel and for payment of its employees’ entire compensation, including salary, withholding taxes, social security taxes, workers’ compensation where required by law, employee and disability benefits and similar benefits.iv.The Appellant shall inform its personnel assigned to the client of their obligation to comply with the proper, lawful and reasonable requirements client’s reasonable requirements concerning the conduct and standards of behavior.v.The client’s responsibilities included:a.Organise weekly meetings to discuss the schedule of expected work and operations.b.Notify the Appellant’s onsite supervisor 24 hours in advance of changes in operations that will affect the performance by the personnel.c.Maintain an inspection, testing and process control system (‘Quality System’).vi.The Appellant shall submit to client an invoice containing any one or a combination of any of the fees illustrated below: a) Kenya Shillings 1,000 (exclusive of Value Added Tax) per tonne of products processed by personnel in a calendar month.

105. TotalEnergies Marketing Kenya Plc and Stratostaff EA Limited – the commencement date of the Agreement was 15th October 2021. The Agreement states in Clauses 2, 10 and 13, and Schedule 3. 2 that:i.The scope of the contract is supply of manpower and related services.ii.The Appellant shall ensure that its personnel, its subcontractors and their personnel shall perform the contract in accordance with the time schedule set out in the contract, …as an independent contractor and neither supplier nor any of its subcontractors nor any of their personnel shall be deemed for any purpose to be the customer’s personnel.iii.In consideration for the provision of the goods and/or services, the customer shall pay the Appellant the prices as specified in Schedule 3. 3 of in the Order. Such prices are fully inclusive of all cost, firm and non-revisable, and shall include all taxes other than VAT.iv.The Appellant’s monthly management fee will be charged at 12. 5% of the sum of each payroll employee’s monthly gross salary, the supplier’s contribution to NSSF, NITA and WIBA, medical examination fees, medical insurance and any other cost mutually agreed upon by the parties.From a review of the contracts provided by the Appellant, it is apparent to the Tribunal that indeed the Appellant undertakes employee outsourcing services to its clients which include providing temporary employees to perform specified tasks for the Appellant’s clients according to the agreements.Section 13(1) and (5) of the VAT Act provides as follows regarding the taxable value of a supply of services: -“(1)Subject to this Act, the taxable value of a supply, including a supply of imported services, shall be—(a)the consideration for the supply; or(b)if the supplier and recipient are related, the open market value of the supply.…(5)In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

106. The Tribunal has sought to establish if the Appellant’s tax treatment of the salaries, wages and other employment costs of the outsourced temporary staff satisfied the threshold for exclusion from the taxable value of the supply of employee outsourcing services as set out under Section 13(5) of the VAT Act.

107. The three contracts that the Tribunal has reviewed demonstrate that the outsourced temporary employees were contractually the Appellant’s employees who were under the direct or indirect supervision of the Appellant’s client/customers during the duration of the tenure of the contracts.

108. It follows then that the Appellant’s payments of salaries, wages and other employment costs to the outsourced temporary employees were made on behalf of its clients/customers and not on its own behalf, and that the Appellant merely facilitated the payments and subsequently recovered the amounts incurred on salaries, wages and other employment costs as disbursements from its clients/customers.

109. The Tribunal’s view is that the Appellant’s billing of the salaries, wages and other employment costs of the outsourced temporary staff as disbursements, thus presenting the amounts without charging VAT, is in line with Section 13(5) of the VAT Act as the provision expressly excludes disbursements from the taxable value of the supply of services.

110. When faced with a similar situtation regarding contracts which set out the terms of payment which separated the employee emoluments (and related taxes) from the fee earned by the Appellant for the various categories of services the Tribunal stated as follows in Preferred Personnel Vs Commissioner of Domestic Taxes I149 of 2022:“As a result of the foregoing, the Tribunal finds that the payments made to the Appellant for reimbursement of employee-related costs are not vatable as they constitute reimbursements of employee salaries and emoluments and therefore not chargeable to VAT. Consequently, the Tribunal finds that the Respondent was not justified in raising the VAT assessment on the total pay received by the Appellant from its clients as only VAT on the service element was taxable and this was accounted for by the Appellant.”

111. The Tribunal was also faced with a similar situation in the case of Techsavana CompanyLimited v Commissioner of Domestic Taxes (Appeal 655 of 2021) [2023] KETAT 331 (KLR) (2 June 2023) (Judgment) where the Tribunal stated as follows in paragraphs 88-90 of its Judgement: -“88. Further, the agreement under Clause 4. 2 states in part as follows;“4. 2The role of the supplier will be limited to administration and staff management. The general functions to be carried out by the supplier include:a.Recruitment of the outsourced staff although the final decision on the staff to be engaged will be approved by Safaricom and Safaricom reserves the right to attend and participate in interviews for the outsourced staff. …….b.…”Under Clause 4. 3 the agreement states in part as follows;“4. 3All aspects of operational and performance management will be carried out by Safaricom. The general functions to be carried out by Safaricom include:a.Shift managementb.Training as set out in schedule 4 and coachingc.Leave management in liaison with the supplierd.Setting of key performance indicators for the outsourced staffe.Performance reviews (including quality management) of Outsourced stafff.Day to day supervision of the Outsourced staffg.…”89. From the above extract of the agreement between the Appellant and its customer (Safaricom) it is clear that the staff at all times were under the direct supervision by Safaricom. The Appellant was therefore a mere facilitator in the recruitment and facilitating their salary payments.90. It was not in dispute that the Appellant had charged and accounted for VAT for the service fees paid to it by its clients in relations to its services as per its respective contracts. The only dispute was in relations to the amounts disbursed under Schedule 3 of the agreement to the outsourced staff. It was the Tribunal’s view that the Appellant having demonstrated that the clients were directly responsible for the remuneration and management of the outsourced staff and that it was merely facilitating the payments, it follows that these amounts were indeed disbursements and not a service subject to VAT.”

112. The Tribunal has also noted that its decision in Techsavvanna case was upheld by the High Court. Accordingly, it holds the view that nothing has been presented before it to persuade it to depart from its previous Judgment. It thus holds the view that the payments made to the Appellant for reimbursement of employee-related costs are not vatable as they constitute reimbursements of employee salaries and such emoluments are not chargeable to VAT.

113. Consequently, the Tribunal finds that the Respondent was not justified in raising the VAT assessment on the total pay received by the Appellant from its clients because VAT was only payable on the income it received for the services that it had offered and this was accounted for by the Appellant on its management fees.

114. Based on the foregoing, the Tribunal finds that the Respondent was not justified in issuing the VAT assessments on the employment costs of outsourced temporary employees for the years 2018, 2019, 2020 and 2021.

Final Decision 115. The upshot of the above analysis is that the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated January 24, 2024 be and is hereby varied in the following terms: -i.The Pay As You Earn (PAYE) assessment is hereby upheld in terms of the Partial Consent dated and filed on the May 24, 2024 that was endorsed as Part Judgment of the Tribunal on the 11th July, 2024. ii.The Value Added Tax (VAT) assessment on unsupported turnover variances in the years 2019, 2020 and 2021 be and is hereby upheld.iii.The Value Added Tax (VAT) assessment on employment costs of the outsourced temporary employees for the years 2018, 2019, 2020 and 2021 be and are hereby set aside.c.The Respondent is hereby directed to recompute the VAT assessments based on the Tribunal’s findings under Orders b) (ii) and (iii) above within Thirty (30) days from the date of delivery of this Judgment.d.Each party to bear its own costs.

116. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF JANUARY, 2025ERIC NYONGESA WAFULA- CHAIRMANGLORIA A. OGAGA- MEMBERABRAHAM K. KIPROTICH- MEMBER