KRA Can't Deny VAT Deductions on Supplier Red Flags Alone, Tribunal Rules

The Tax Appeals Tribunal has set aside a KSh15.76 million VAT assessment against an events company after determining that the Kenya Revenue Authority (KRA) failed to prove that purchases from a supplier it had classified as a "missing trader" were not genuine.

• Chairmania Events Ltd. appealed the tax assessment after KRA disallowed input VAT it had claimed on equipment it hired from Terrex Traders Limited including tents, projectors, sound systems, chairs, dais and video systems used to serve its clients. 
• The tax agency rejected the input VAT because it said Terrex was a “missing trader”, a supplier whose transactions it could not verify, raising doubts over whether the invoices and electronic tax receipts reflected genuine purchases that the events firm was entitled to deduct from its VAT bill.
• The Tribunal ruled that KRA cannot disallow a company’s input-VAT claim simply because its supplier has been flagged as a “missing trader,” finding that once a taxpayer provides the required records, the tax authority must investigate and prove that the underlying transactions were not genuine.

“It is settled law that the burden of proof in tax cases is not stationary, it swings like a pendulum between the taxpayer and the taxman. The initial burden rests on the taxpayer with a presumption of correctness attaching to the KRA’s assessment, however upon adduction of evidence by the taxpayer the burden swings to the tax authority to disprove the taxpayer’s assertions,” the four-bench tribunal ruled. 

In its submissions, KRA said Chairmania's bank statements showed no evidence of payments to Terrex and that the company had not provided supplier statements or delivery notes to corroborate the transactions. The events firm rebutted that it had submitted tax invoices and electronic receipts, proof of payment, supplier ledgers, and payment vouchers.

Chairmania said its bank records demonstrated payment, while KRA said the same records did not show payments to Terrex. The Tribunal did not resolve that dispute by independently determining whether the individual payments occurred. Instead, it focused on whether KRA had done enough to displace Chairmania's documentation.

Under the VAT Act, a taxpayer can deduct input VAT where the tax relates to a taxable supply and the statutory requirements have been met. Among other requirements, the taxpayer must be registered for VAT, make taxable supplies, claim the deduction within the prescribed period, and hold the required documentation. 

“If the taxpayer has complied with the applicable law, then the information obtained from third parties should not be used to forcefully bring them within the tax dragnet because there is never an intendment or equity presumption about tax. A taxpayer should only be taxed based on the textual reading of the applicable statute, and nothing more,” the tribunal stated. 

The Tribunal noted that KRA itself acknowledged that Chairmania had met the preliminary requirements: it was VAT registered, made taxable supplies, charged VAT and claimed the input tax within the required period. It ruled that it was upon KRA to prove that the transactions were not genuine rather than simply raise doubts about them. While the Tribunal affirmed that KRA could use third-party information such as a “missing trader” designation, it stated that such a finding must be independently investigated or corroborated before it can be used to deny a taxpayer’s claim.