VAT NOW APPLICABLE ON REPOSSESSED AND AUCTIONED ASSETS: WHAT YOU NEED TO KNOW

May 6, 2025

By Maina Susan – Tax & Finance Writer

Lending institutions are now mandated to file in their VAT obligations and liabilities upon any auctioning of repossessed assets in the case of defaults from debtors.

This position was reinforced by the recent ruling from the Tax Appeals Tribunal (TAT) in a case between Kenya Commercial Bank (KCB) and the Commissioner of Legal Services and Board Coordination of the Kenya Revenue Authority (KRA).

Case Details

Appellant: KCB Bank
Respondent: KRA

i) Case Background

KRA issued a notice of assessment on 31st August 2023 after carrying out a tax audit on KCB for the fiscal period 2018 to 2022.

The tax audit assessed the bank’s compliance with Corporate Income Tax (CIT), Value Added Tax (VAT), Pay-As-You-Earn (PAYE), and Withholding Tax obligations. The findings revealed a tax evasion case amounting to Ksh 1.19 billion (1,190,578,054.00).

Upon receipt of the notice of assessment, KCB objected to the assessment’s findings via a notice of objection filed on 27th December 2023.

Subsequently, on November 27, 2023, KRA issued its objection decision, revising the interest and adjusting the additional tax assessment to Ksh 1.22 billion (1,216,775,932.00).

Upon KRA’s affirmation of its original assessment, KCB, dissatisfied with KRA’s decision, filed an Instant Appeal on 27th December 2023 with the TAT.

ii) KCB’s Stance.

On 9th January 2024, KCB highlighted the following as grounds for appeal:

For starters the Income tax Act specifies that “VAT is a consumption tax aimed at end-users and transactions that involve supply of goods and services that should generally attract VAT unless specifically exempted.”

Additionally, Part 2 of the First Schedule Paragraph 1 (h) to the VAT Act provides as follows:

‘‘The supply of the following services shall be exempted

The following financial service: The making of any advances or the granting of any credit.’’

In line with the aforementioned income tax laws, KCB argued that VAT liability should not apply to the disposal of seized assets since seizure and auction of vehicles is directly linked and intertwined with credit provision: a financial service that is tax exempt.

The bank argued that since its primary objective was to auction repossessed vehicles solely for bad debt recovery rather than profit generation, it should qualify for a tax exemption. This, in turn, would relieve the lending institution of any VAT obligations on the loan recovery process.

It is important to note at this juncture that the said paragraph does not in any way explicitly exempt the process of credit recovery from debtors from VAT.

iii) KRA’s Stance

Section 2 (1) of the VAT act defines “taxable supply” as;

“a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.’”

In accordance with the clause defining taxable supply, KRA ruled that KCB was liable for VAT on all repossessed vehicle sales during the assessed period.

Furthermore KRA argued that KCB carried out the sales of the Motor Vehicles to third parties which according to the Income Tax Act cited above qualifies as a taxable event under the VAT Act.

The tax man further argued that there exists no exemption for auction sales citing that KCB had simply stepped into the shoes of the debtor as a creditor during the auctioning process. By transferring the ownership of the car to themselves, they had also transferred any liability implications including VAT tax liability.

KRA concluded that KCB was responsible for all VAT obligations arising from the sale of all auctioned vehicles.

iv) Judgement

After analysis of the two arguments by KCB and KRA, the tribunal arrived at the following finalities:

Tax laws are to be interpreted strictly.

The tribunal affirmed that strict interpretation of Part 2 of the First Schedule paragraph of the income tax act is imperative.

Exemption only applies to the process of credit provision and not on the methods of credit recovery.

Hostile Sale

Section 2 (1) of the VAT Act defines “supply of goods” to mean a sale, exchange, or other transfer of the right to dispose of the goods as owner.”

The Tax Appeals Tribunal (TAT) ruled that KCB’s auction sales qualified as a “hostile sale”, meaning that the bank forcibly sold the debtor’s assets to recover outstanding loans. By stepping into the debtor’s position and executing the sale, KCB assumed the same tax obligations as the debtor, including VAT compliance.

Since KCB acquired and sold the vehicles for loan recovery, it was deemed a seller under the VAT Act, making the sales taxable.

v) Ruling

The Tribunal dismissed KCB’s appeal and upheld KRA’s assessment, ruling that the bank must settle all outstanding tax obligations as determined in the audit report.

Conclusion

From the case study above, it’s crucial for businesses to strictly adhere to tax laws. Companies involved in auctioning activities, in particular, must ensure tax compliance to avoid penalties and non-compliance fees. Key actions include:

Conducting periodic evaluations of financial transactions to identify compliance gaps.
Utilizing Tax Amnesty Programs, such as the current program running until June 30, 2025, to make voluntary disclosures.
Engaging tax consultants for due diligence and operational audits to ensure adherence to tax regulations.

By taking these proactive steps, businesses can avoid costly tax disputes and remain compliant with the law.

Final Take Away

To ensure your business stays compliant with tax laws and avoids penalties, Quartet Tax Solutions is here to help.

We offer expert services in tax audits, compliance assessments, and strategic tax planning, including guidance on leveraging the current Tax Amnesty Program.

Don’t wait until it’s too late – contact us today to schedule a consultation and safeguard your business from costly tax issues.

Let Quartet Tax Solutions guide you through the complexities of tax compliance.

Disclaimer:

This article is for informational purposes only and does not constitute professional tax advice. For specific guidance on tax issues, please consult a tax advisor.

Case Reference and Sources