VAT on Labour Outsourcing and Staff Costs in Kenya 2026

The Finance Act 2026 introduced Section 13(5A) into the VAT Act, one of the most welcome changes for Kenya's outsourcing and staffing industry. From 1 July 2026, employee costs — salaries, wages, NSSF, SHIF, NITA, housing levy — paid through outsourcing providers are deemed disbursements and excluded from the taxable value. Only the service fee or management margin attracts 16% VAT.

This guide explains the change, which sectors benefit, how to restructure contracts, and what it means for your input VAT recovery.

What Changed Under the Finance Act 2026

Before the Finance Act 2026, Section 13(5) of the VAT Act allowed disbursements to be excluded from the taxable value only if the supplier could satisfy the Commissioner that it was acting as a principal-agent and had made a disbursement to a third party. The High Court in Techsavana and Stratostaff held that outsourcing firms are the legal employers, not agents — meaning the full invoice (salaries + margin) was subject to VAT at 16%.

The Finance Act 2026 introduces Section 13(5A), which provides that where a supplier provides labour, outsourcing, or employee-placement services and incurs employee-related costs, those costs are deemed to be disbursements made on behalf of the client. This removes the need to prove a principal-agent relationship — the treatment is automatic by statute.

What Counts as Employee-Related Costs

The Act defines employee-related costs to include:

• Salaries and wages
• NSSF contributions (National Social Security Fund)
• SHIF contributions (Social Health Insurance Fund, formerly NHIF)
• NITA levy (National Industrial Training Authority)
• WIBA premiums (Work Injury Benefits Act)
• Housing levy (Affordable Housing Programme)
• Any other statutory deductions prescribed by law

Every Sector Affected

The change benefits any business that provides or uses outsourced staff. Here is how each sector is affected:

Before vs After: Worked Example

A security company charges a client KES 500,000 per month for 10 guards. The breakdown: KES 450,000 in salaries and statutory deductions, KES 50,000 management fee.

The client saves KES 72,000 per month in VAT — and the security company's compliance burden is simplified.

Input VAT Implications

Compliance Requirements

1. Review and restructure contracts — Service Level Agreements must clearly distinguish the service fee from salary disbursements. Vague contracts risk reclassification by KRA.
2. Update invoicing — Invoices must itemise employee costs (as disbursements) separately from the service fee. Use eTIMS-compliant invoices.
3. Classify correctly — Service contracts (e.g., a consultancy delivering a project) remain fully taxable. Only genuine labour outsourcing contracts qualify for the disbursement treatment.
4. Align accounting treatment — Salary pass-through should be treated as disbursements, not revenue, in your books.
5. No retrospective application — If you have a pre-July 2026 VAT dispute with KRA, it remains governed by the old law and court rulings. Seek professional advice.
6. File monthly VAT returns via iTax by the 20th of each following month. See our filing guide.

Frequently Asked Questions

Related Resources

• Finance Act 2025 and 2026 VAT Changes in Kenya — Complete summary of all VAT changes from both Finance Acts
• How to File VAT Return on iTax — Step-by-step guide to filing your monthly VAT return
• KRA VAT Penalties Reference — Complete guide to VAT penalties and waiver process
• VAT for Startups and Tech Businesses — VAT guide for tech companies including outsourced developer costs