High Court Rules Insurance Salvage Disposal is VAT Exempt

Case Study: Commissioner of Domestic Taxes v ICEA Lion General Insurance Company Limited (Income Tax Appeal E105 of 2023) [2025] KEHC 14865 (KLR) (Commercial and Tax) (23 October 2025) (Judgment)

Background Facts

• The Kenya Revenue Authority (KRA) conducted a tax audit on ICEA Lion General Insurance for 2015-2018.
• KRA issued an assessment demanding VAT on the proceeds from the sale of salvaged motor vehicles (wrecked cars the company had taken ownership of after paying out total loss claims).
• The Tax Appeals Tribunal ruled in favor of ICEA Lion, and KRA appealed to the High Court.

Kenya Revenue Authority (KRA) argued:

• The disposal of salvage is a simple sale of goods, separate from the initial transaction.
• The proceeds are trading income, not compensation.
• Since the sale of salvage is not explicitly listed as an exempt supply in the VAT Act, the default position is that it is taxable.
• Tax statutes must be interpreted strictly, and exemptions cannot be implied.

ICEA Lion argued:

• The disposal of salvage is an integral and incidental part of providing insurance services, which are exempt from VAT.
• It is a direct consequence of the fundamental insurance principles of indemnity (making the policyholder whole) and subrogation (the insurer stepping into the policyholder’s shoes after paying a claim).
• The activity is a loss recovery mechanism, not a profit-making trade. In accounting, the proceeds reduce the claims expense, not recorded as revenue.
• The entire process constitutes a single, composite supply of an exempt insurance service.

The High Court’s Decision & Key Legal Reasoning

The Court dismissed KRA’s appeal and upheld the Tribunal’s decision. The key reasons were:

• Harmonious Interpretation of Statutes: The Court held that the VAT Act and the Insurance Act must be read together. While the VAT Act exempts “insurance services” without defining them, the Insurance Act defines “insurance business” to include “any business incidental to insurance.” The disposal of salvage is such an incidental activity.
• Insurance Law : The Court emphasized that acquiring and selling salvage is not a voluntary commercial purchase. It is a legal consequence of the doctrines of indemnity and subrogation. The insurer acquires the salvage by operation of law to mitigate the loss from the claim payment.
• Single Composite Supply Doctrine: The Court applied the principle that if multiple elements form a single, indivisible economic supply, they should not be artificially split. The primary supply is the exempt insurance service. The disposal of the salvage is merely the final step in this process, not a separate supply. Therefore, the entire transaction is VAT-exempt.
• Economic Substance Over Form: The Court looked at the economic reality of the transaction. The proceeds from the salvage are a recovery of a loss, not income from a trading activity. This is reflected in their accounting treatment as a reduction of claims expense.

Final Order

The appeal was dismissed as lacking merit. The KRA was ordered to pay costs of Kshs 50,000 to ICEA Lion.

In essence, the High Court affirmed that the sale of insurance salvage is not a separate business but the final step in settling an insurance claim, and thus falls under the VAT exemption for insurance services.