Where the input tax attributable to exempt supplies is less than 5% of total input tax, this situation is referred to as de minimis and all input VAT can be recovered.
There are three methods specified in the VAT Act to be used to determine the portion of VAT incurred that can be deducted as input tax:
a value-based method requiring the recovery proportion to be calculated in accordance with the ratio of taxable supplies to total supplies;
a method requiring all VAT to be recovered where VAT can be attributed to taxable supplies, and no VAT to be recovered where it relates to exempt supplies. The remaining (residual) VAT is then recovered according to the value of taxable supplies expressed as a proportion of total supplies; and
a special method that is fair and reasonable to the nature of the business, but this must be approved by the Commissioner of Domestic Taxes before being used.
Partially exempt taxpayers are expected to pass an annual VAT adjustment at the end of each calendar year. The purpose of the annual adjustment is to adjust the amount of input tax recovered during the year so that distortions resulting from the varying monthly recovery rates are ‘levelled’ by an annual recovery rate.
Any amount overpaid or under-claimed should be accounted for in the VAT return for the first tax period in the following calendar year (i.e. the January return).
Preregistration and post- deregistration VAT
When, on the date he becomes registered, a person:
has in stock goods on which VAT has been paid and which are intended for use in making taxable supplies; or
has constructed a building or civil works or has purchased assets for use in making taxable supplies,
such a person may, within six months, claim relief from the VAT paid in respect of the above, provided that such buildings or civil works are constructed, or such goods or assets are purchased, within 12 months immediately preceding registration, or within such period, not exceeding 24 months, as the Commissioner may allow.
Where a person ceases to make taxable supplies, he must notify the Commissioner of the date of cessation and furnish a return showing details of materials, other goods in stock and taxable assets, as well as their value and the VAT due on such goods within 30 days from the date on which he ceased to make taxable supplies.
The term ‘import’ in the VAT Act means to bring into Kenya from either a foreign country or from an EPZ. The Commissioner of Customs Services is charged with the responsibility of collecting the VAT on imported goods at the various ports of entry into the country when goods are cleared for home use. Transit goods are not subject to VAT.
A VAT-registered person is able to deduct from his output tax the input tax incurred on the importation of goods, subject to the maintenance of the relevant import documentation and any restrictions.
No input tax may be deducted in relation to imported goods unless a registered person is in possession of:
a valid tax invoice;
a customs entry duly certified by the proper officer and a receipt for the payment of tax; or
a customs receipt and a certificate signed by the Commissioner of Customs Services stating the amount of tax paid, in the case of goods purchased from a customs auction.
Any imported taxable service is liable to a reverse VAT charge. Reverse charge VAT is payable by anybody importing a taxable service, including private individuals.
For fully taxable businesses, reverse charge VAT is fully recoverable and represents cash outflow cost in one month and a cash inflow or cash saving in the subsequent month. However, for private individuals and businesses that are unable to, or can only partially recover their input tax, reverse charge VAT represents an actual cost.
The tax point for imported services is the earlier of the date:
the service is received;
the invoice for the service is received; or
full or partial payment is made for the service.
Any goods exported by a registered person or supplied by that person to an EPZ are zero-rated where the registered person holds evidence of exportation consisting of: