VAT Bad Debt Relief Kenya 2026

If your customer does not pay, you can claim back the VAT you already remitted on that unpaid invoice - this is called VAT bad debt relief. The Finance Act 2026 extended the waiting period from 2 years to 3 years, unless the customer enters statutory management, receivership, or liquidation, in which case you can claim immediately.

How Bad Debt VAT Relief Works

When you issue a VAT invoice to a customer, you must remit the VAT to KRA regardless of whether the customer pays you. If the customer defaults, you have paid VAT to KRA on income you never received. Bad debt relief allows you to reclaim that VAT.

Example:

You invoice a customer KES 116,000 (KES 100,000 + KES 16,000 VAT)
You remit the KES 16,000 VAT to KRA on your monthly return
The customer defaults and never pays
After 3 years (or earlier if the customer goes into liquidation), you claim back the KES 16,000

Qualifying Conditions

Taxable supply: The debt must arise from a standard-rated (16%) or zero-rated (0%) supply. Exempt supplies do not qualify
eTIMS-compliant invoice: You must have issued a valid eTIMS invoice for the supply
VAT accounted for: You must have already remitted the VAT to KRA on your return
Waiting period: 3 years from the date of supply (extended from 2 years by Finance Act 2026), unless the customer enters statutory management, receivership, or liquidation
Recovery attempts: You must have taken reasonable steps to recover the debt
Written off: The debt must be written off as irrecoverable in your accounting records
Not a related party: The customer must not be a related party to you

Key Change Under Finance Act 2026

The bad debt relief waiting period was extended from 2 years to 3 years. This means:

For supplies made before 1 July 2026 where 2 years have already passed, the old 2-year rule likely applies - check with a tax advisor
For supplies made on or after 1 July 2026, you must wait 3 years before claiming unless the customer's financial distress accelerates the timeline
The immediate claim trigger for customers in statutory management, receivership, or liquidation remains unchanged - this is not affected by the extension

How to Apply

Ensure the debt qualifies under all conditions above
Prepare supporting documents: original eTIMS invoice, proof of VAT remittance, evidence of recovery attempts (demand letters, emails, legal notices), debt write-off confirmation from your accounting records, declaration that the customer is not a related party
Log in to iTax and navigate to the bad debt relief application section
Submit the application with all supporting documents attached
KRA reviews and issues a decision - if approved, the refund is processed or offset against future VAT liabilities

What If the Customer Later Pays?

If the customer pays you (even partially) after you received the bad debt refund, you must repay the refunded VAT to KRA on your next VAT return. This is a straight reversal: you received KES 16,000 as a refund, the customer pays you KES 116,000, you remit KES 16,000 back to KRA.

Related Resources

VAT Refund Guide Kenya - General VAT refund process and documentation
Finance Act 2026 VAT Changes - All VAT-related changes including bad debt relief timeline
Monthly VAT Filing Service (KES 3,500/month) - We handle returns, refund claims, and compliance

Frequently Asked Questions

What is VAT bad debt relief in Kenya?

VAT bad debt relief allows a supplier to claim a refund of VAT paid to KRA on supplies where the customer never paid. If you issued an invoice, charged VAT, and remitted that VAT to KRA, but the customer defaulted on payment, you can claim back the VAT portion after a specified waiting period.

How long must I wait before claiming bad debt VAT relief?

The waiting period was extended from 2 years to 3 years by the Finance Act 2026. However, if the customer enters statutory management, receivership, or liquidation before the 3-year period ends, you can claim immediately - you do not need to wait the full 3 years.

What qualifies as a bad debt for VAT purposes?

The debt must arise from a taxable supply of goods or services where: (1) you have issued an eTIMS-compliant invoice and accounted for the VAT, (2) the customer has not paid the full consideration within the waiting period, (3) you have taken reasonable steps to recover the debt, and (4) the debt has been written off in your accounting records as irrecoverable.

Can I claim bad debt VAT relief if my customer is a related party?

No. Bad debt relief does not apply to debts arising from supplies between related parties. KRA treats related-party transactions as potentially structured to create artificial bad debt claims. You must be dealing at arm's length with an independent customer.

What happens if I later receive payment after claiming the refund?

If you receive payment (or part payment) from the customer after successfully claiming the bad debt VAT refund, you must repay the refunded VAT to KRA on your next VAT return. You effectively reverse the bad debt claim in proportion to the amount recovered.

How do I apply for VAT bad debt relief?

The claim is submitted through the KRA iTax portal. You file an application with supporting documentation: the original eTIMS invoice, evidence of VAT remittance, proof of recovery attempts (demand letters, legal notices), evidence that the debt has been written off, and a declaration that the customer is not a related party. The application is reviewed by KRA and approved or rejected within a statutory period.