TAT reaffirms that input VAT cannot be denied solely on supplier non-compliance

By Victoria Mokaya, Senior Associate - Tax

A recent Tax Appeals Tribunal (TAT) decision provides important guidance on the deductibility of input VAT where a taxpayer possesses the documentation required under Section 17 of the VAT Act, even where KRA questions the supplier's compliance status. 

Background

KRA issued an additional VAT Assessment of approximately KES 15.8 million after disallowing input VAT claimed by Chairmania Events Limited on purchases from a supplier, Terrex Traders Limited.

KRA contended that the supplier was a "missing trader", in that certain invoices and ETR receipts could not be authenticated and that there was insufficient evidence to support the existence of the underlying transactions. 

The taxpayer maintained that it had provided all the relevant documentation, including:

  • Tax invoices and ETR receipts;
  • Proof of payment;
  • Supplier ledgers;
  • Payment vouchers; and
  • Other supporting records. 
Key Issue

The issue for determination before the TAT was whether KRA can deny a taxpayer's input VAT claim on account of a supplier's alleged non-compliance, notwithstanding that the taxpayer has complied with the requirements of Section 17 of the VAT Act.

1.
Section 17 sets out the conditions for claiming input VAT

The Tribunal emphasized that Section 17 of the VAT Act specifies the requirements a taxpayer must satisfy to claim input VAT. Once those conditions are met and the taxpayer provides the prescribed documentation, the claim should not be denied/rejected based on requirements not contemplated by the law.

2
The burden of proof shifts

Importantly, the Tribunal reiterated that the burden of proof in tax disputes is not static.

Although the taxpayer has the primary obligation to adduce relevant and competent evidence, the evidential burden subsequently shifts to the KRA to contest or refute that evidence.

The Tribunal found that the taxpayer had furnished the required documents and that KRA failed to adequately dismantle or rebut the evidence. 

3.
Taxpayers are not responsible for policing suppliers

One of the most significant aspects of the decision is the Tribunal's finding that Section 17 does not require a taxpayer to verify whether its supplier has filed tax returns or complied with its tax obligations. 

The Tribunal observed that taxpayers generally have no visibility over third-party tax compliance data, which remains within KRA's control. Accordingly, KRA cannot impose obligations on taxpayers that are not expressly provided for in the legislation. 

4.
Third-party data alone is insufficient

The Tribunal acknowledged KRA's right to use third-party data and analytics in compliance activities. However, it held that such information should be corroborated through further investigations and additional evidence before being relied upon to deny a taxpayer's claim. 

The Tribunal ultimately allowed the appeal and set aside KRA's objection decision, reaffirming that taxpayers should only be assessed in accordance with the requirements expressly set out in the applicable tax legislation.

Why this decision matters

This judgment reinforces several important principles, that:

  • A taxpayer's entitlement to input VAT is determined by the law and supporting documentation rather than by unverified allegations regarding supplier compliance status;
  • Once a taxpayer provides the documentation and/or evidence prescribed under Section 17 of the VAT Act, the evidential burden disapproval shifts to KRA;
  • KRA cannot impose additional conditions for deducting input VAT outside the VAT Act; and
  • Taxpayers should not be required to verify information that is exclusively within KRA's possession or control. 
Practical takeaway for businesses

Businesses should continue maintaining robust VAT documentation, including;

  • Tax invoices, 
  • ETR receipts, 
  • Payment records, 
  • Supplier ledgers, and 
  • Supporting commercial documents. 
Conclusion

This decision provides useful authority against attempts to deny input VAT solely based on supplier side compliance concerns.