Guide — Finance Act Changes
Finance Act 2025 & 2026: VAT Changes for Kenyan Businesses
Two Finance Acts in two years have reshaped Kenya's VAT landscape. The threshold may be rising, the refund window has shrunk, fintech services are now taxable, and bad debt rules have changed. This guide summarises every VAT change you need to know — and what to do about them.
VAT Registration Threshold: KES 5M vs KES 8M
Current threshold: KES 5 million
The Finance Act 2025 proposed raising the mandatory VAT registration threshold from KES 5 million to KES 8 million in annual taxable turnover. However, as of July 2026, the effective date has not been announced via Gazette notice. The KRA website and iTax portal still reference the KES 5 million threshold. Until a formal commencement notice is issued, continue using KES 5 million as the registration threshold.
What this means for your business: If your turnover is between KES 5 million and KES 8 million, you are still required to register for VAT under current rules. If the KES 8 million threshold takes effect, you may be able to deregister — but wait for the official notice.
VAT Refund Window Reduced to 12 Months
Change: The Finance Act 2025 reduced the timeline for applying for VAT refunds from 24 months to 12 months from the date the tax became due and payable.
Effective: 1 July 2025
Impact: If you have excess input VAT that arose before July 2025, you had 24 months to claim. For excess arising after July 2025, you have only 12 months. Many businesses have already lost refunds by not realising the window had shrunk.
Urgent: If you have excess input VAT from August 2025 or later, check when the 12-month window expires. Many businesses have already lost refunds by missing the new deadline.
Fintech Services Now Subject to 16% VAT
Change: The Finance Act 2026 reclassified payment processing, settlement, merchant acquiring, gateway, and aggregation services supplied over a software or platform from VAT exempt to taxable at the standard rate of 16%.
Effective: 1 July 2026
Impact: This is a significant change for Kenya's fintech sector. Payment service providers, mobile money aggregators, and payment gateway operators must now charge 16% VAT on their fees. Businesses using these services will see increased costs. If you are a fintech company, update your pricing and invoicing immediately. If you use payment services, check whether your provider has started charging VAT.
Bad Debt Relief Timeline Reset to 3 Years
Change: The Finance Act 2025 reduced the bad debt relief qualifying period from 3 years to 2 years. The Finance Act 2026 increased this back to 3 years, restoring the pre-2025 position.
Effective: 1 July 2026
Impact: If you have unpaid invoices, you must wait 3 years from the date of supply before you can claim VAT relief on the bad debt. Review your aged debtors list and identify invoices approaching the 3-year mark. Prepare documentation showing you have taken reasonable steps to recover the debt.
90:10 Input VAT Apportionment Rule Deleted
Change: The Finance Act 2025 deleted the 90:10 rule from the VAT Act. Previously, if your exempt supplies were less than 10% of total turnover, you could claim full input VAT deduction without apportionment. That exemption is gone.
Effective: 1 July 2025
Impact: All businesses with mixed taxable and exempt supplies must now apportion input VAT using the turnover-based formula. Even if your exempt supplies are only 2-3% of total turnover, you must apportion. Update your accounting system or spreadsheet to calculate the apportionment automatically each month.
Need help with apportionment? See our Input VAT Deduction Guide for the full apportionment formula and worked examples.
Input VAT Deduction for Supplies to Government Security Agencies
Change: The Finance Act 2026 introduced full input VAT deduction and refunds for input relating to otherwise-exempt supplies made to the Kenya Defence Forces (KDF), Defence Forces Welfare Services (DEFWES), National Intelligence Service (NIS), and National Police Service (NPS).
Effective: 1 July 2026
Impact: If you supply goods or services to these agencies, you can now claim input VAT on related costs even though the supplies themselves are exempt. This is a significant relief for businesses that contract with government security agencies. Ensure you have proper documentation linking your purchases to the specific contracts.
Other Notable Changes
Invoice requirements tightened
All registered persons must now issue a tax invoice at the time of supply, regardless of whether the supply is taxable or not. Previously, invoices were only required for taxable supplies. This affects exempt suppliers who now need invoicing systems.
Labour outsourcing costs excluded from taxable value
Where a supplier provides labour, outsourcing, or employee placement services, employee-related costs (salaries, wages, statutory deductions) are deemed disbursements on behalf of the client and excluded from the taxable value of the supply. This reduces the VAT burden on outsourced labour.
Digital broadcasting added to taxable digital services
Internet, radio, or television broadcasting services provided by non-residents are now explicitly included in the scope of taxable digital services.
Mosquito repellent exempted from VAT
Mosquito repellent products were reclassified from 16% VAT to exempt, effective 1 July 2025.
Tea and coffee packaging materials zero-rated
Packaging materials for tea and coffee are now zero-rated (0%), allowing suppliers to claim input VAT and apply for refunds.
Manufacturing capital goods exemption extended
The VAT exemption on capital goods for the manufacturing sector, granted before 27 December 2024, was extended to apply until 27 December 2025.
What You Should Do Now
- Check your iTax portal for any pending refunds — the 12-month window may have already expired for some periods.
- If you are a fintech or payment service provider, update your systems to charge 16% VAT on fees effective 1 July 2026.
- Review your aged debtors list for invoices approaching 3 years — you may qualify for bad debt relief soon.
- If you have mixed supplies (taxable and exempt), implement the input VAT apportionment formula immediately.
- If you supply government security agencies, start tracking input VAT on related purchases for refund claims.
- If you use outsourced labour or staffing services, check that your supplier has correctly excluded employee costs from the taxable value.
Frequently Asked Questions
- What is the VAT registration threshold in Kenya for 2026?
- The VAT registration threshold is KES 5 million in annual taxable turnover. The Finance Act 2025 proposed raising the threshold to KES 8 million, but this has not yet taken effect as of July 2026. Always check the latest KRA guidance, as the effective date may be announced via a Gazette notice. If your turnover exceeds KES 5 million, you are required to register for VAT.
- What is the VAT refund application deadline for 2026?
- The deadline is 12 months from the date the tax became due and payable. The Finance Act 2025 reduced this from 24 months, effective 1 July 2025. The Finance Act 2026 did not change this further. Any refund not applied for within 12 months is forfeited. Check your iTax portal now — if you have excess input VAT older than 12 months, you may have lost the right to claim it.
- Are payment processing services now subject to VAT?
- Yes. The Finance Act 2026 reclassified payment processing, settlement, merchant acquiring, gateway, and aggregation services supplied over a software platform from VAT exempt to vatable at the standard rate of 16%, effective 1 July 2026. This means fintech companies and payment service providers must now charge 16% VAT on their fees. Businesses using these services will see increased costs.
- What is the bad debt relief timeline for VAT purposes?
- Under the Finance Act 2026, the minimum qualifying period for VAT relief on bad debts is 3 years (reverted from 2 years, effective 1 July 2026). If you supplied goods or services and accounted for the VAT, but the customer has not paid after 3 years, you can apply for a refund of the VAT. You must demonstrate the debt is genuinely irrecoverable.
- Was the 90:10 input VAT apportionment rule removed?
- Yes. The Finance Act 2025 deleted the 90:10 rule that previously allowed businesses with exempt supplies under 10% of total turnover to claim full input VAT deduction. All businesses with mixed supplies must now apportion input VAT based on the ratio of taxable to total turnover. Update your accounting processes if you were relying on the 90:10 rule.
- Can I claim input VAT on supplies made to the Kenya Defence Forces?
- Yes. The Finance Act 2026 introduced full input VAT deduction and refunds for input relating to exempt supplies made to the Kenya Defence Forces (KDF), Defence Forces Welfare Services (DEFWES), National Intelligence Service (NIS), and National Police Service (NPS). This is an exception to the general rule that input VAT on exempt supplies is not deductible. You need supporting documents showing the supplies were directly related to these entities.