Exempt supplies under Kenyan VAT
Which supplies Kenyan VAT exempts, why exempt is a different code from zero-rated, and how to code exempt lines on your invoices in Achekam.
By Achekam · · 4 min read · For Running a business businesses in Kenya
"No VAT on this one" sounds like a single idea, but in Kenyan VAT it can mean three different things. The supply may be exempt. It may be zero-rated. Or it may be outside the scope of VAT altogether. All three put nothing in the VAT column of the invoice. They are not interchangeable, and a business that uses them loosely ends up with returns that describe its sales wrongly.
This article is about the first of the three: exempt supplies. It covers the main exemptions named in the law, why exempt and zero-rated are kept apart, how an exempt line is coded in Achekam, and the questions worth taking to your tax adviser.
Three common exemptions
Kenya's VAT Act lists exempt supplies in its Second Schedule. Among them, at the time of writing:
- financial services;
- unprocessed agricultural produce;
- the letting of residential premises.
Each of these has edges. "Financial services" is a defined idea, not every service a financial business sells. "Unprocessed" raises the question of how much handling turns produce into something processed. "Residential premises" is about homes, and a landlord who also lets commercial space needs to look at that letting separately. The full schedules sit in the consolidated VAT Act on Kenya Law, which covers registration, the standard and zero rates, the exempt and zero-rated schedules, tax invoices, input tax and returns. Read the wording of the item you rely on, not a summary of it.
Exempt is a different code from zero-rated
Kenya also zero-rates some supplies in the Fifth Schedule of the same Act, such as exports of goods, supplies to export processing zones and ship stores. A zero-rated supply is taxable, at 0%; an exempt supply is not taxed at all. On the face of a single invoice the difference is invisible, because the VAT on the line is nil either way.
The difference shows up elsewhere: in how the supply is reported on the return, and in how the VAT Act treats the VAT you paid on the costs of making it. That second point can matter a great deal to a business with large exempt sales, so ask your adviser how your own mix of exempt, zero-rated and standard-rated sales affects the input VAT you claim. Zero-rated exports are covered in zero-rated exports and EPZ supplies in Kenya.
Exempt sales and VAT registration
A Kenyan business must apply for VAT registration within 30 days once its taxable supplies reach KES 5 million in 12 months. The test is about taxable supplies, and an exempt supply is, by its nature, not taxed. A business whose sales are mostly or wholly exempt should ask its adviser how the threshold applies to it, rather than assume it must register, or that it never will.
Coding exempt lines in Achekam
Once the Kenya country pack is activated under Settings, Jurisdiction & regulators, a Kenyan business picks a tax code on each invoice line: standard, zero-rated, exempt, out of scope or reverse charge. Only standard lines carry VAT, at the approved rate for Kenya. The standard rate in Kenyan law is 16% at the time of writing.
There is one more thing to know. Every Kenyan tax figure in Achekam waits for approval by an Achekam platform administrator before it is used, and that includes the standard VAT rate. While the Kenyan VAT rate rule awaits approval, Achekam refuses to charge standard-rate VAT on an invoice and tells the user to choose a tax code without VAT or wait. Exempt lines, which carry no VAT, go through. Standard lines may have to wait. What that means for your invoicing in the meantime is explained in VAT awaiting approval in Nigeria and Kenya.
A mixed invoice, worked in words
Suppose an invoice has two lines. Your adviser has confirmed that the first is an exempt supply. The second is a standard-rated service.
- Code the first line exempt. No VAT is charged on it, and Achekam lets it through.
- Code the second line standard. Once the Kenyan standard rate is approved, VAT is charged on it at that rate. If the rate is still awaiting approval, Achekam refuses to charge it and asks you to choose a code without VAT or wait.
What you must not do is code the standard line as exempt to get the invoice out. That would understate the VAT due on the sale and misdescribe it on your return. If the invoice cannot wait, raise the exempt line now and the standard line separately once the rate is approved.
Whichever codes you use, the invoice still goes through eTIMS, and the VAT return in Achekam lists any invoices that were not fiscalised; see unfiscalised sales on a Kenyan VAT return.
Questions for your tax adviser
Take this list to your adviser once, and write down the answers:
- Which of our sales, if any, are exempt, and under which item of the Second Schedule?
- Which are zero-rated instead, and under which item of the Fifth Schedule?
- Which are outside the scope of VAT altogether?
- How do our exempt sales affect the input VAT we claim on shared costs?
- Do our exempt sales count towards the registration threshold in our case?
- What evidence should we keep on file for each exempt line?
Then turn the answers into a short coding guide for whoever raises invoices, so that nobody has to decide afresh each time which code a line takes.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
