How the Tax Appeals Tribunal Handled EWP Case on Input VAT Deductions

Case Study: Edge Worth Properties Limited (EWP) v Commissioner of Legal Services and Board Coordination (Tribunal Appeal E993 of 2024) [2025] KETAT 187 (KLR) (28 February 2025) (Judgment)

Background

In a letter dated 7th September 2023, KRA issued EWP with a notice of intent to carry out an audit on its operations for the period 2018 to 2022 and issued a pre-assessment notice on 14th December 2023.

KRA issued additional assessments for the years 2018-2022 on 30th April 2024, which EWP objected to on 30th May 2024.

KRA issued an Objection decision on 25th July 2024 partially allowing EWP’s Objection.

EWP, being dissatisfied with KRA’s Objection decision, filed its Notice of Appeal dated 23rd August 2024

Among the grounds of appeal were:

• That KRA erred in law and in fact in disallowing input VAT incurred by EWP in levelling the land after the excavation of construction materials on the basis that EWP had an intention to plant hay, which according to KRA is an exempt supply under Paragraph 43 of the Value Added Tax Act, Chapter 476 of the Laws of Kenya.

EWP’s Arguments

• The levelling and vegetation clearance were necessary after the excavation and sale of construction materials (a taxable supply).
• The costs were incidental to its core business, making the input VAT claimable under Section 17(1) of the VAT Act, which allows deductions for input tax incurred in making taxable supplies.
• Hay farming was merely an idea but never materialized. Since no exempt supply was made, KRA’s disallowance was speculative
• The mandate to conserve the environment is provided for under the “Polluter pays principle”. That the polluter pays principle requires that those who pollute the environment are responsible for the costs of cleaning up the damage, compensating victims, and restoring the environment
• EWP cited Highlands Mineral Water Limited v Commissioner of Domestic Taxes (2020), where the court held that input VAT claims should not be denied based on future hypothetical supplies.
• The VAT Act allows deductions within 6 months of the supply, and EWP complied

KRA Arguments:

• KRA relied on EWP’s letter (21st December 2023), where it stated that the levelling was done to prepare the land for hay farming. Since hay farming is an exempt supply under Paragraph 43 of the VAT Act, the input VAT was not claimable under Section 17(1).
• That EWP’s primary business (construction materials) had already concluded when the levelling costs were incurred. Since the levelling was not contemporaneous with taxable supplies, the input VAT was not deductible.
• EWP failed to prove that the levelling was legally mandated (e.g., environmental regulations) for its taxable business.

Tribunal’s Findings:

• The Tribunal agreed that hay farming never happened, making KRA’s argument speculative.
• The Tribunal cited Highlands Mineral Water Limited, emphasizing that input VAT claims must be assessed based on actual supplies, not hypothetical future activities.
• The Tribunal found that EWP’s initial statement about hay farming was not conclusive evidence of exempt supply intent. The primary purpose was land rehabilitation post-excavation, which could still relate to taxable business activities.

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