Case Reference: Nextgen Mall Management Company Limited v Commissioner of Domestic Taxes (Tax Appeal 1496 of 2022) [2024] KETAT 545 (KLR) (26 April 2024); HCITA No. E173 of 2024 [2025] KEHC 14506 (KLR) (9 October 2025); Tax Appeal E1498 of 2025 [2026] KETAT 264 (KLR) (27 July 2026)
The Dispute
The dispute began when the Commissioner of Domestic Taxes conducted an audit of Nextgen Mall Management Company Limited’s Income Tax and VAT affairs for the years 2016 to 2020. The company had been established to manage the common areas of Nextgen Mall along Mombasa Road on behalf of unit owners. Its role was simple: collect service charge contributions from owners and disburse them to third-party property managers who actually provided the services.
Following the audit, the Commissioner issued an additional tax assessment of Kshs. 119,873,193 on 18th August 2022 – comprising Kshs. 38,550,556 in income tax and Kshs. 81,322,637 in Value Added Tax. The Commissioner’s position was that the company was providing taxable management services, charging a service fee of Kshs. 35 per square foot, and had crossed the VAT registration threshold without registering.
The company lodged an objection on 7th September 2022, arguing that it was a non-trading entity holding a reversionary interest for members, that the contributions were not income, and that it was merely a conduit passing funds to third-party service providers. Upon review, the Commissioner rejected the objection through an Objection Decision dated 3rd November 2022, confirming the full liability.
The Tribunal, and the Long Road to Justice
Dissatisfied, Nextgen Mall Management Company Limited appealed to the Tax Appeals Tribunal (Tax Appeal 1496 of 2022), arguing that the Commissioner had erred in treating member contributions as taxable income and taxable supplies for VAT. The company contended that it was not a profit-making enterprise, that the service charge was merely a reimbursement of costs, and that the actual management services were rendered by professional property managers who charged VAT on their invoices.
However, the Tribunal dismissed the appeal on 26th April 2024, holding that the company had failed to discharge its burden of proof. The Tribunal found that the company had not provided key documents requested by the Commissioner, including its Memorandum and Articles of Association, VAT exemption certificate, detailed activity clarifications, and general ledgers.
The company did not give up. It appealed to the High Court (HCITA E173 of 2024), arguing that the Tribunal had erred by ignoring documents that had actually been provided. On 9th October 2025, the High Court allowed the appeal, setting aside the Tribunal’s judgment and remitting the matter back to the Tribunal for a fresh hearing before a different panel.
Following the High Court’s order, the Commissioner issued a fresh objection decision on 2nd December 2025 – again rejecting the objection and sustaining the full Kshs. 119,873,193 assessment. The company filed yet another appeal (Tax Appeal E1498 of 2025). This time, the company came prepared with three witnesses and comprehensive documentary evidence.
The Tribunal’s Findings
On 27th July 2026, the new Tribunal panel delivered its judgment, allowing the appeal in its entirety. The Tribunal affirmed several crucial principles:
First, pass-through fiduciary funds are not taxable income. The Tribunal examined the sale agreements, the agreement between the company and unit owners’ representatives, and the minutes of general meetings. It found that the service charge contributions were funds held in a fiduciary capacity, impressed with a single contractual purpose – settling outgoings on common areas. The company was merely a conduit, not a principal. It rendered no service on its own account, added no margin, and retained nothing as a fee.
Second, an accounting error does not create taxable income. The Tribunal noted that the company had made a serious error in its financial reporting by presenting member contributions as income and claiming corresponding costs as expenses. Under IFRS 15, funds held in a fiduciary capacity for third parties are not revenue of the holder. The correct treatment was to recognise the cash received together with a corresponding liability to the unit owners. The Tribunal held that an erroneous presentation can neither create income where none exists nor extinguish income where it exists. Liability to tax is imposed by statute upon the true nature and legal character of a transaction, and not upon the accounting entries by which a taxpayer records it.
Third, reimbursements are not consideration for a taxable supply. The evidence showed that professional property managers – Davita Management Limited, Broll Kenya Limited, and RDL Property Managers Limited – actually rendered the management services, invoiced for them, and charged VAT. What the company received from the owners was reimbursement of costs, not payment for its own services. To charge VAT on the gross contributions would be to tax, a second time, supplies upon which VAT had already been charged and accounted for.
Fourth, an exemption certificate is not required where no income exists. The Commissioner had placed considerable emphasis on the absence of a VAT exemption certificate. The Tribunal held that an exemption presupposes income that would otherwise be chargeable. Where receipts are not income at all, no exemption arises for certification.
Practical Implications for Property Managers and Management Companies
This case reinforces critical principles that every property manager, homeowners’ association, members’ club, and management company must understand:
1. The Legal Character of Transactions Matters More Than Accounting Labels
If you collect money from members and pass it through to third-party service providers, that money is not your income. It is a liability – funds held for others. But you must be able to prove it. The Tribunal made it clear that the true nature of a transaction determines tax liability, not how you record it in your books. If you mistakenly record pass-through funds as income, that error does not convert them into taxable income – but it will attract an audit and a lengthy dispute.
2. Keep Documents That Prove the Fiduciary Nature of Funds
You need written agreements with members showing the agency or fiduciary relationship. You need minutes of general meetings where service charge rates are set and ratified. You need invoices from third-party service providers showing they actually rendered the services and charged VAT. You need financial statements that correctly present the funds as liabilities, not as income. Without these documents, the taxman will treat all money that hits your account as your income.
3. The Burden of Proof Never Fully Shifts Away
Under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the taxpayer carries the burden of proof. While providing primary documents may initially shift the evidential burden, when the Commissioner raises doubts based on discrepancies, the burden swings back to you to clear those doubts. You must provide cogent documentary evidence that the disputed receipts are not taxable.
4. Correct Financial Presentation Is Critical
Funds held in a fiduciary capacity for third parties should be recognised as a liability in the statement of financial position, not as income in the statement of profit or loss. Under IFRS 15, receipts destined for third-party providers from inception never enter the measurement of revenue at all. Get professional accounting advice. Fix your books before KRA comes knocking.
