Q: I am selling my building, which comprises of office spaces; do I have to add VAT to the purchase price?
A: Yes. In a follow up to our earlier article on the applicability of VAT on sale of commercial property, we look at the Court Of Appeal’s decision in Kenya Revenue Authority V Ndegwa(Civil Appeal 65 of 2019) [2025] Keca 510 (KLR)
The High Court in David Mwangi Ndegwa v Kenya Revenue Authority [2018] eKLR, held that property transactions were not subject to VAT. KRA, did not agree with the High Court’s decision and interpretation of “Land” in the context of Paragraph 8 Part II of the First Schedule of the Value Added Tax Act and appealed the decision to the Court of Appeal.
Going off the definition of land as per Article 260 of the Constitution, 2010, the High Court’s reasoning was that land was inseparable from the structures on it and the two had to be viewed as one entity. Therefore,by exempting the sale of land, the act also exempted all structures and buildings on it, whether commercial or otherwise.
Upon appeal, the Court of Appeal (the court) overturned the High Court’s ruling, siding with KRA. The court held that the High Court erred in holding that for the purposes and in the context of the VAT Act, land includes buildings erected thereon, and thus that the sale of commercial property was exempt from VAT under this head by virtue of their being on land.
The court said that context is key in the interpretation of statute as the text cannot operate in a vacuum. It held that the definition of land as is in the Constitution of Kenya is not for universal application as contemplated by the opening words of article 260, “In this Constitution, unless the context requires otherwise—…land includes…” The explicit definition and exemption of residential premises by the legislature even though the same is also erected on land and is in its airspace is not merely vanity or an oversight but rather speaks to their intent. The intent being that the Act does not exempt the sale of commercial property, unlike residential property, which is explicitly exempted.
The court therefore held that there is no ambiguity in paragraph 8 of Part II of the First Schedule of the Act on supply of services exempt from VAT and that the High Court erred in finding and holding otherwise.
WHAT IS THE IMPLICATION OF THIS DECISION?
The Court of Appeal’s decision in KRA v Ndegwa has clarified that VAT is applicable on the sale of commercial property at 16%, in addition to Stamp Duty and other costs, requiring stakeholders to comply with this interpretation.
VAT is a liability of the vendor but is recoverable from the purchaser and is therefore added to the purchase price. Agreements for sale, lease or letting will therefore have to be deliberately drafted in manner that clearly outlines which party shall bear the responsibility for VAT.
Legal and financial advisors must ensure clients understand these obligations to avoid disputes with tax authorities.
The judgment can be found here.
