Case Reference :Mu-Bei Stainless and Toughend Glass Ltd v Kenya Revenue Authority (Tax Appeal E1101 of 2025) [2026] KETAT 205 (KLR) (6 July 2026) (Judgment)
The Dispute
The dispute began when the Commissioner of Domestic Taxes conducted a review of MU-BEI Stainless and Toughened Glass Limited’s VAT compliance for the tax periods of December 2024 and March 2025. Following the inquiry, the Commissioner issued a Pre-Assessment Notice on 25th June 2025, alleging under-declaration of sales and demanding additional VAT of Kshs. 1,344,153.38 for December 2024 and Kshs. 375,120 for March 2025, together with penalties and interest.
The Commissioner’s investigation had established that for December 2024, the company had transmitted invoices worth Kshs. 9,800,958.62 through the eTIMS platform but had only declared sales of Kshs. 1,400,000 in its VAT returns, resulting in an under-declaration of Kshs. 8,400,958.62. Further, a banking analysis for March 2025 revealed bank deposits amounting to Kshs. 9,319,500 against declared sales of Kshs. 6,975,000, resulting in an alleged under-declaration of Kshs. 2,344,500. The Commissioner raised additional assessments on 23rd July 2025, demanding a total VAT liability of Kshs. 1,718,357.21.
MU-BEI Stainless and Toughened Glass Limited lodged an objection on 28th July 2025, but upon review, the Commissioner rejected the objection through an Objection Decision dated 23rd September 2025, confirming the full liability.
The Tribunal, and Appeal
Dissatisfied, MU-BEI Stainless and Toughened Glass Limited appealed to the Tax Appeals Tribunal (TATC/E1101/2025), arguing that the Commissioner had erred in treating client disbursements as taxable supplies contrary to Section 13(5) of the Value Added Tax Act, 2013. The company contended that as a contractor, it frequently received funds from clients solely for procuring construction materials on their behalf, and these funds merely passed through its account without constituting taxable income.
The company further argued that the Commissioner’s banking analysis was fundamentally flawed because it compared bank deposits from January to May 2025 with VAT returns covering only January to March 2025, rendering the assessment unreliable. However, the Tribunal dismissed the appeal on 6th July 2026, holding that the company had failed to provide sufficient documentary evidence to prove that the disputed receipts qualified as statutory disbursements excluded from VAT.
The Tribunal’s Findings
The Tribunal affirmed several crucial principles:
First, while the Appellant advanced a plausible explanation that it merely acted as an agent and relied upon withholding tax certificates in support of its position, it failed to produce sufficient documentary evidence demonstrating the existence of agency relationships contemplated under Section 13(5) of the Value Added Tax Act. The company had no written agreements with clients showing agency relationships, no client instructions in writing, no procurement contracts, and could not show a clear paper trail linking each deposit to a specific client and corresponding supplier payment.
Second, pointing out weaknesses in the Commissioner’s methodology did not relieve the taxpayer of its statutory burden to demonstrate the correct taxable position through proper reconciliations and supporting documentation. Despite questioning the banking analysis methodology, the company failed to reconcile the significant variance between the eTIMS invoices and its VAT declarations, and likewise did not reconcile the disputed bank deposits with individual client transactions, supplier payments, contractual documentation, or agency arrangements.
Third, the burden imposed by Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act required the taxpayer to establish through cogent documentary evidence that the disputed receipts qualified as statutory disbursements excluded from VAT. The company’s failure to provide additional documents requested by the Commissioner, including agency agreements and detailed reconciliations, was fatal to its case.
Practical Implications for Taxpayers in the Construction Industry
This case reinforces critical principles that every taxpayer and professional must understand, particularly those in the construction industry who handle client funds:
1. Agency Relationships Must Be Documented in Writing If you claim that money passing through your account is not taxable because you are acting as an agent for your clients, you must have formal agency agreements in place. The Tribunal made it clear that withholding tax certificates and bank statements showing money moving quickly in and out are not enough. You need contemporaneous written agreements, client instructions, and procurement contracts that clearly establish you were acting as a mere conduit, not as the principal in the transaction. Without these documents, the taxman will treat all money that hits your account as your income.
2. You Cannot Point to the Commissioner’s Mistakes Alone While it is perfectly fine to point out mistakes in how the KRA conducted their investigation, such as comparing bank deposits from different time periods, you cannot stop there. You still have a responsibility to show what your correct tax position should be. The Tribunal acknowledged that the KRA had made a legitimate error in its banking analysis methodology, but the company had not done enough to show what the correct tax position should have been. Pointing out the Commissioner’s flaws without providing your own reconciliation is not enough to win your case.
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 like bank statements and invoices may initially shift the evidential burden, when the Commissioner raises legitimate doubts based on discrepancies, the burden swings back to you to clear those doubts. The company failed to provide additional documents requested by the Commissioner, including agency agreements, client instructions, and detailed reconciliations linking each receipt to a specific client and supplier payment.
4. Keep Complete Records That Tell One Consistent Story Section 43 of the VAT Act requires every registered person to keep full and true records for five years, including tax invoices, credit and debit notes, purchase invoices, receipts, tax accounts, stock records, and other documentation necessary to determine tax liability. In this case, the company’s records did not tell a consistent story. While they claimed the money was for purchasing materials on behalf of clients, they could not produce written agency agreements or client instructions to support this claim. The record showed money coming in and going out, but the paper trail linking these transactions to specific agency relationships was missing.
