VAT on commercial property

Investors jittery over VAT on commercial property.

By Carol Muasya

It has definitely not been business as usual for the Kenya Revenue Authority following a recent decision by the High Court relating to Value Added Tax on commercial buildings. This judgment comes in the wake of a civil suit filed by a taxpayer who had purchased a commercial building in Kiambu County and paid 16% VAT on the same.

Some of the issues in contention were the determination of whether there is a legal distinction between the treatment of land vis-à-vis buildings and whether the law exempts sale of land from tax.The argument in this instance was whether the law exempts a sale of land from tax, and only tax a sale of the property standing on the said land. This would then beg the question;would it be possible to sell a building without selling the land?

This dispute arose when the taxpayer bought a parcel of land on 11th December 2013 from Standard Chartered Bank Kenya but the Seller’s advocate was unwilling to complete the transaction unless the taxpayer paid VAT of Kshs 11 Million. The taxpayer was of the opinion that VAT is not payable on transactions for the sale or purchase of land, irrespective of the type of buildings standing thereon (residential or commercial). He however paid the VAT in order to complete the transaction and went on to seek a refund from KRA unsuccessfully. He then filed a suit seeking judgement from the High Court on whether he was obligated to pay VAT on the transaction. This would necessitate a refund from KRA for the VAT he paid together with interest at court rates.

The argument raised by the taxpayer was based on his interpretation of the First Schedule of the VAT Act which specifically exempts from VAT the “…supply by way of sale, renting, leasing, hiring, letting of land or residential premises”. The taxpayer further relied on definition of land as per Article 260 of the Constitution of Kenya which states that land includes “…the surface of the earth and the subsurface rock as well as… the airspace above the surface”. Going by the above provisions the taxpayer concluded that land includes anything (immovable) that is situate on the said land, in which case the sale or purchase of land on which commercial buildings sit is nevertheless a sale of land, and therefore exempt from VAT.

The Revenue Authority, on the other hand, sought to distinguish residential premises from commercial premises. KRA submitted that commercial premises are defined as “Land or buildings not occupied or not capable of being occupied as residential premises” and that the VAT Act only exempts the sale of residential premises, whereas the sale of commercial premises is subject to VAT at the standard rate of 16%.

In his judgement, the High Court judge concluded, based on the Constitution’s definition of land, that land includes buildings sitting on the land, irrespective of whether the buildings are residential or commercial. The judge therefore ordered that VAT should not be charged on sale or purchase of land, regardless of the nature of the buildings that sit on the land. The judge also ordered KRA to refund the VAT in question to the taxpayer together with interest at the court rates.

This judgment serves as a major blow to KRA since the general understanding has been that sale of commercial buildings (or land occupied by commercial buildings) is subject to VAT and numerous transactions have been concluded on this basis. Is the VAT paid by all these purchasers now refundable? A sizeable budget of KRA’s tax collections would also be in such VAT, traditionally collected upon sale or purchase of commercial property. How will the Government plug the hole if this VAT is no longer collectible? These are some of the issues to watch out for going forward even as KRA intends to appeal against this judgment.

On 17th January 2019, KRA was granted a stay of execution on the High Court judgment. This ideally means that the taxpayer cannot collect from KRA the VAT that he had paid for purchase of the property until the KRA’s application (presumably for leave to appeal) is heard and determined by the Court of Appeal. It also means that, for the moment, VAT will remain chargeable on similar transactions.

As F.J. Raymond correctly put it “Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund. It would therefore be interesting to see how this matter unfolds and if any VAT refunds will be forthcoming to taxpayers especially those who had previously purchased commercial properties and had paid VAT on the same.

 

Carol Muasya is a Senior Advisor at Andersen Tax, Kenya: carol.muasya@AndersenTax.co.ke

Andersen Tax, Kenya is a member firm of Andersen Global. Andersen Global is an international association of legally separate, independent member firms comprised of tax and legal professionals around the world. Established in 2013 by U.S. member firm Andersen Tax LLC, Andersen Global now has nearly 4,000 professionals worldwide and a presence in over 126 locations through its member firms and collaborating firms.

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