Case reference: County Government of Kiambu v Commissioner of Legal and Board Services (Tax Appeal E812 of 2025) [2026] KETAT 71 (KLR) (26 March 2026)
Introduction
On 26 March 2026, the Tax Appeals Tribunal in Nairobi delivered a landmark judgment in the case of County Government of Kiambu v Commissioner of Legal and Board Services (Tax Appeal No. E812 of 2025). The decision partially allowed Kiambu County’s appeal against tax assessments issued by the Kenya Revenue Authority (KRA) for the period 2019/2020 to 2022/2023, setting aside substantial portions of the demanded taxes while confirming others. The judgment establishes critical principles on the taxation of county governments, the treatment of imprests, airtime benefits, motor vehicle benefits, and the procedural requirements for valid objection decisions.
This article provides a comprehensive analysis of all matters discussed in the judgment.
Background of the Dispute
KRA conducted a compliance check on Kiambu County and issued additional assessments dated 1 August 2024 totaling Kshs. 559,866,840.53. The assessments covered Pay As You Earn (PAYE), Withholding Income Tax (WHIT), Withholding Value Added Tax (WHVAT), Withholding Rent Income Tax (WHRIT), and Value Added Tax (VAT) for the period 2019/2020 to 2022/2023.
Kiambu County filed a notice of objection on 17 April 2025. KRA issued its objection decision on 13 June 2025, partially allowing the objection but still confirming Kshs. 194,590,799.27 as taxes due. Dissatisfied, Kiambu County filed an appeal after obtaining leave from the Tribunal to file out of time.
The Memorandum of Appeal raised six main grounds, challenging KRA’s demands for PAYE, withholding taxes, and VAT on the county’s own source revenue, as well as the taxation of pool cars and the failure to appreciate the exempt nature of county services.
Value Added Tax on County Own Source Revenue
One of the most significant holdings in the judgment concerns VAT on fees, licenses, permits, and other charges collected by Kiambu County as own source revenue (OSR). KRA had demanded VAT of Kshs. 17,917,840.11 on the county’s OSR, arguing that the revenue streams had not been declared for VAT and that output VAT was chargeable.
Kiambu County argued that it performs constitutionally decreed functions under the Fourth Schedule of the Constitution, which are social welfare services, not a business. Under Section 2 of the Value Added Tax Act (VATA), a “taxable supply” requires a supply made in the course or furtherance of a business. The county maintained that it cannot be termed as engaged in a business while performing constitutional functions.
Crucially, Kiambu County invoked Paragraph 9 of Part II of the First Schedule to the VATA, which expressly exempts “Community, social, and welfare services provided by the National Government, County Government, or any political sub-division thereof.” The county argued that its services fall squarely within this exemption. It also contended that subjecting county levies to VAT would amount to unlawful double taxation, as consumers of county services would be taxed twice – first through the county levy and again through VAT on the same payment.
KRA responded that most revenues were generated from licenses, permits, and fees charged for services provided by the county, and that it had advised the Council of Governors on revenue streams that do not attract VAT versus those that should be charged VAT. KRA noted that only rent from stalls, houses, and stadia hire charges attract VAT, and had revised its assessment accordingly.
The Tribunal’s analysis was thorough and principled. It observed that counties are constitutional creatures under Article 176, and their functions under the Fourth Schedule are intended to improve the social welfare status of residents. The Tribunal held that counties are not entities formed to raise or collect money for the furtherance of business. Accordingly, their services fall outside the definition of taxable services to which VAT under Section 5(1) of VATA applies.
The Tribunal emphasized that Kiambu County’s actions in raising fees through licenses and permits were lawful and did not morph its character into a business entity. Notably, KRA did not even aver that Kiambu County had stepped outside its constitutional mandate. The Tribunal found that the county’s assertion that it was engaged in carrying out its functions, and was thus not liable to pay VAT, was sufficient evidence to settle the issue that it was not engaged in furtherance of any business amounting to a taxable supply. KRA ought to have provided cogent evidence that the county was acting outside its legal mandate to succeed in its assertion.
Applying the burden of proof principles from the Abyssinia Iron and Steel Ltd case, the Tribunal held that once Kiambu County provided sufficient evidence that KRA’s assessment was erroneous, the onus shifted to KRA to “push back” and show that its assessment was not arbitrary, capricious, or imagined. KRA failed to do so.
The Tribunal therefore found and held that Kiambu County had proved on a balance of probabilities that it was not engaged in the provision of a taxable supply, and that fees earned from its statutory functions to support the social and welfare well-being of Kiambu County residents are not amenable to VAT. The entire VAT assessment was set aside.
PAYE on Motor Vehicle Benefits
Kiambu County had argued that motor vehicles assigned to various departments were “pool cars” used rotationally by officers in the discharge of official duties, not vehicles for personal use. The county explained that the vehicles are departmental vehicles, not procured for particular employees, and their use is rotational and subject to recall or reassignment as departmental needs arise. Accordingly, they cannot be deemed to constitute personal benefits.
KRA countered that the vehicles were for the exclusive use of senior county officers including the Governor, Deputy Governor, County Executive Committee Members, Chief of Staff, and County Attorney. Under Section 5(2B)(a) of the Income Tax Act (ITA), provision of a vehicle to an employee is a taxable benefit. KRA noted that Kiambu County did not provide vehicle logs to enable KRA to establish whether the vehicles were exclusively used for county activities or for personal use.
The Tribunal found against Kiambu County on this issue. The critical failure was that the county did not adduce any piece of evidence to support its assertions. It provided no motor vehicle movement schedules or activity logs, and no evidence that the vehicles were parked at county premises after working hours. The Tribunal held that Kiambu County failed to discharge its burden of proof, and therefore the PAYE on motor vehicle benefits was confirmed.
PAYE on Airtime Benefit
The dispute over airtime and internet bundles provided to county officers for official use resulted in a victory for Kiambu County.
Acknowledging KRA’s Prescribed Rate: It is important to note that the KRA PAYE Guide 2017 explicitly lists “Telephone (Landline and Mobile Phones)” as a prescribed benefit, with the taxable value set at 30% of bills .. KRA’s position in the audit was entirely consistent with its own administrative prescription – that employer‑provided telephone/airtime is a taxable benefit at 30% of the cost.
However, the Tribunal drew a crucial distinction that is itself recognised within the same guide. On page 10 of the PAYE Guide 2017, under the definition of “Monthly pay,” the guide expressly excludes “any amount which is mere reimbursement of expenses of employment” from taxable income. Examples given include subsistence allowance, mileage allowance, and traveling expenses incurred in the course of employment.
KRA had argued that the airtime benefit is taxable at 30% of its cost. Kiambu County maintained that the applicable taxes were withholding VAT on payments to telecommunication firms, which had already been remitted and evidenced by EFTs. The parties agreed that what was provided was airtime and internet bundles, not a payroll allowance for airtime.
The Tribunal found that when airtime is provided as an allowance appearing on a payslip, it attracts 30% PAYE – this is the classic prescribed benefit scenario. However, when airtime and internet bundles are provided to employees for official use without being a cash allowance, they do not translate into a “gain from employment” envisaged under Sections 3(2) and 5(2) of the Income Tax Act. Instead, they amount to a reimbursement of expenses or the provision of a working tool. The applicable tax was the Withholding VAT (WVAT) on the payment to the telecom provider, which the county had already remitted.
The Tribunal therefore held that KRA erred in confirming the assessment on airtime benefit PAYE and set it aside. The decision does not overturn KRA’s prescribed rate; it simply confirms that the rate applies to benefits, not to genuine reimbursements of work‑related expenses. The burden is on the employer to prove that the airtime was for official duties only – a burden Kiambu County successfully discharged.
PAYE on Excess Pension
KRA had determined that Kiambu County made excess pension contributions above the permissible statutory limit of Kshs. 20,000(currently KES 30,000) per employee. The county claimed that the excess payment resulted from a “system error.”
The Tribunal noted that Kiambu County provided no schedules, no supporting documents, and no details of the alleged error in pension calculations. Having failed to discharge its burden of proof, the Tribunal confirmed the PAYE assessment on excess pension contributions.
PAYE on Extraneous Allowances, Payments to Individuals, and Chief Officers
This set of issues produced one of the most important legal principles from the judgment. KRA had assessed PAYE on various allowances and payments made to chief officers and staff, arguing that Kiambu County failed to provide payment vouchers, surrender imprests, and other supporting documents to demonstrate that the payments were used for county activities and fully accounted for.
Kiambu County responded that the payments were facilitative in nature, not remunerative, and that payment vouchers had been provided. The Tribunal observed that KRA, in its objection decision, admitted receiving payment vouchers but did not specify which vouchers were allegedly missing.
The Tribunal’s landmark holding concerned imprests. It held that under no circumstances do imprests become subject to PAYE. The reasoning was clear and powerful: imprests are either liquidated by imprest surrenders or surcharged to the respective employee in default of surrender. Imprests are recoverable from an employee to be paid back to the employer. An imprest does not accrue to an employee as income. It is never the employee’s money. It is money that must be refunded to the employer.
The Tribunal emphasized that Section 3(1) of the Income Tax Act, which is the charging section, taxes gains or profits from employment or services rendered. Unlike salaries, allowances, or related benefits given for services rendered, an imprest is money given to cover specific employer expenses. It cannot be taxed unless it is shown that the holder has breached the employer’s imprest policy or converted the money such that it will never be recovered.
Citing the “trawler principle” from R v Commissioner of Domestic Taxes ex-parte Barclays Bank of Kenya Ltd, the Tribunal stated that KRA cannot exercise its duty like a trawler in the deep seas, expecting all the fish by casting its net wide. KRA was obliged to explain how and why a non-taxable item like an imprest had become ripe for taxation. KRA’s action of subjecting imprests to PAYE simply because they were not accounted for was found to be unfounded and unsustainable.
The Tribunal further noted that stating that a document to confirm that the imprest has been accounted for is not sufficient to deal with an item that is not ordinarily taxable. That explanation only applies to items that are prima facie taxable, where the taxpayer is required to discharge the burden on why they are not taxable. Here, KRA failed to distinguish taxable and non-taxable items and failed to list the unsupported payment vouchers.
Accordingly, the Tribunal set aside the PAYE tax assessments charged on imprests to chief officers, to individuals, and on extraneous allowances.
PAYE Return Review Variances
KRA had identified variances between self-assessed PAYE and recomputed PAYE in the iTax system. Kiambu County claimed these variances resulted from KRA’s system computation error relating to insurance relief for employees and tax exemptions for persons with disabilities (PWD).
The Tribunal found that the county neither provided schedules to support its claim nor filed an amended return to correct the alleged error. Having failed to discharge its burden of proof, the Tribunal confirmed the PAYE assessment under this heading.
PAYE on Women and Children Pension Scheme (WCPS) and Security Benefit
Kiambu County conceded to the PAYE assessment on the Women and Children Pension Scheme (WCPS), so the Tribunal confirmed it without further analysis. Regarding the security benefit, KRA had shown that payments to employees for security operations exceeded the PAYE threshold and that the county did not provide documents to prove PAYE was paid. The Tribunal confirmed that assessment as well.
Withholding Taxes
The withholding taxes in dispute comprised Withholding Rental Income Tax (WHRIT), Withholding Income Tax (WHIT), and Withholding VAT (WVAT) totaling Kshs. 66,877,459.54. Kiambu County conceded to the WHRIT assessment of Kshs. 160,550.00, so that was confirmed.
For WHIT and WVAT, Kiambu County argued that it had provided statements, reconciliations, and supporting documents of payments that did not attract withholding tax. KRA acknowledged in its objection decision (paragraphs 55-56) that the county had indeed provided these documents and that KRA had validated EFT payments with bank statements. KRA further admitted that there were EFT payments for withholding taxes that had not been factored in when raising the assessments, and that some payments did not attract withholding tax.
However, KRA issued a blanket confirmation of the assessments without providing any breakdown of which EFT payments had not been factored in or which transactions actually attracted withholding tax. The Tribunal found that this fell short of the mandatory requirements of Section 51(10) of the Tax Procedures Act (TPA) , which expressly provides that an objection decision must include reasons for the decision, including a clear demonstration of the basis upon which KRA reached such a decision.
The Tribunal noted that the EFT payments for withholding tax that had not been factored into the assessment did not form part of the substance of the objection and could not have been introduced at that stage. KRA did not provide a breakdown of the EFT payments that had not been factored in, nor a breakdown of the withholding tax that was not supported.
Citing the principle from Republic v Kenya Revenue Authority ex parte Bata Shoe Company (Kenya) Limited that a taxpayer is not obliged to pay a single coin more than is due and the taxman is entitled to collect up to the last coin that is due, the Tribunal held that KRA’s blanket confirmation without details exposed Kiambu County to the risk of overpayment. The Tribunal set aside the assessments on Withholding VAT and Withholding Income Tax.
Penalties and Interest
Kiambu County argued that penalties are intended to punish deliberate non-compliance and should not be imposed where the taxpayer has acted in good faith and the dispute turns on interpretation or accounting treatment, citing Commissioner of Domestic Taxes v Menengai Oil Refineries Ltd and Primarosa Flowers Limited v Commissioner of Domestic Taxes. The county also cited Unilever Kenya Limited v Commissioner of Income Tax for the principle that interest is ancillary to principal tax.
Since the Tribunal set aside the principal assessments on VAT, WHIT, WVAT, and PAYE on imprests and airtime benefits, the associated penalties and interest fell as well. The Tribunal did not need to conduct a separate analysis.
Burden of Proof
The Tribunal applied the burden of proof provisions under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act. It adopted the principle from Abyssinia Iron and Steel Ltd v Commissioner of Customs and Border Control: once the taxpayer provides evidence that KRA’s assessment was wrong, KRA must push back and show that its assessment was not arbitrary, capricious, or imagined. The onus then shifts back to the taxpayer once KRA has discharged its burden.
Applying this framework, the Tribunal found that Kiambu County succeeded on VAT because it provided prima facie evidence (constitutional mandate and the Paragraph 9 exemption) and KRA failed to push back. Kiambu County failed on motor vehicle benefits and excess pension because it provided no evidence at all. Kiambu County succeeded on imprests and airtime because it provided documentation and KRA failed to distinguish taxable from non-taxable items or to provide the required reasons.
Final Orders
The Tribunal partially allowed the appeal and varied KRA’s objection decision dated 13 June 2025 as follows:
- The PAYE tax assessments charged on imprests to chief officers, to individuals, on airtime benefits, and on extraneous allowances were set aside.
- Assessments on Withholding VAT and Withholding Income Tax were set aside.
- The VAT assessment was set aside.
- Each party was ordered to bear its own costs.
- The PAYE on motor vehicle benefits, excess pension, return review variances, WCPS, security benefit, and WHRIT were confirmed.
