VAT on Outsourced Staff in Kenya: What Section 13(5A) Changes for Staffing and BPO Providers

For years, the question for a Kenyan staffing or outsourcing company was whether VAT applied to everything it invoiced a client, or only to its fee. From 1 July 2026, the Finance Act, 2026 gives a statutory answer for employee costs. It inserts new subsections (5A) and (5B) into section 13 of the Value Added Tax Act, and it does so after the High Court decided the point the other way. This article sets out what the new VAT rule on outsourced staff says, what came before it, and what a supplier or client should check now.

What the new VAT rule on outsourced staff says

Section 26 of the Finance Act, 2026 (Act No. 19 of 2026) amends section 13 of the VAT Act, which deals with the taxable value of a supply. Two new subsections follow section 13(5):

1. Subsection (5A): subject to subsection (5), where a supplier provides labour, outsourcing or employee placement services and incurs employee-related costs, those costs are deemed to be disbursements made by the supplier on behalf of the client.
2. Subsection (5B): for that purpose, “employee related costs” includes salaries, wages, statutory deductions and such other related costs.

The Kenya Revenue Authority’s Finance Act guidance describes the effect in the same terms: employee costs such as salaries, wages and statutory deductions are treated as disbursements where a supplier provides labour, outsourcing or employee placement services.

Why it matters: the position before 1 July 2026

Section 13(5) of the VAT Act includes in the value of a service any incidental costs the supplier incurs in making the supply. Its proviso excludes a disbursement from the taxable value only if the Commissioner is satisfied that the supplier “has merely made a disbursement to a third party as an agent of his client”.

The courts read that proviso narrowly for staffing models. In Commissioner of Domestic Taxes v Techsavana Company Limited [2025] KEHC 6643 (KLR), decided on 23 May 2025, the High Court set aside a Tax Appeals Tribunal decision and upheld a VAT assessment on the full amount charged for outsourced developers. The judge’s reasoning was that the supplier “held the purse strings”: it had contracted to identify and second qualified personnel, and under the agreement it was solely responsible for managing them. Press reports in March 2026 describe a further High Court decision, involving Stratostaff E.A. Limited, reaching the same result for the period 2018 to 2021. We have not read that judgment and refer to it only as reported. The Tribunal had earlier accepted, in Stratostaff E.A. Limited v Commissioner of Domestic Taxes [2025] KETAT 58 (KLR), that salary recoveries billed as disbursements were outside VAT where the clients were directly responsible for the staff.

The result was a real exposure for suppliers who had invoiced salary recoveries without VAT, and higher cost for clients who could not recover the tax. Section 13(5A) reverses the direction for periods on and after 1 July 2026.

Effective date and past periods

The VAT rule on outsourced staff started on 1 July 2026. Section 1 of the Finance Act, 2026 brings every section into operation on 1 July 2026, except sections 17, 18 and 24 (1 January 2027) and section 43 (1 September 2026). Section 26 is not among the exceptions. We found no retrospective, savings or transitional provision in the Act. On its face, therefore, section 13(5A) does not reach earlier periods. A supplier with open assessments or audit queries for periods before 1 July 2026 remains governed by section 13(5) as the courts have applied it, and should take advice on those periods separately.

Practical effect on the invoice

In practice, the VAT rule on outsourced staff changes how the invoice is built. Tax practitioners read the amendment as meaning VAT applies to the supplier’s margin or service fee and not to the deemed disbursements. The section itself does not use those words. It deems the costs to be disbursements, and under section 13(5) a disbursement is excluded from the taxable value, so the supplier’s own fee stays in the VAT base. The practical points follow.

1. Separate the charges. An invoice or contract that bundles salaries with the management fee makes it harder to show which part is a deemed disbursement. Show employee-related costs and the service fee on separate lines.
2. Check what counts. Subsection (5B) says “includes” salaries, wages and statutory deductions and “such other related costs”, so the list is not closed. It does not define the other related costs. Costs that are not employee-related, such as a supplier’s overheads, equipment or training charges, are not obviously within the deeming rule.
3. Align contract wording. Contracts that describe the supplier as the sole employer, or that give the supplier full control of remuneration, sat at the centre of the Techsavana reasoning. Section 13(5A) deems the costs to be disbursements regardless, but review the contract so that its description of the costs matches the invoice.
4. Review VAT returns for July 2026 onwards. Confirm that the taxable value on outsourcing supplies now excludes employee-related costs, and that the system generates the correct invoice and return lines.
5. Clients should check the VAT shown on supplier invoices. Input tax is claimed on VAT actually charged, so an invoice that still charges VAT on salaries should be queried with the supplier.

The open question: “subject to subsection (5)”

Subsection (5A) opens with the words “Subject to subsection (5)”. Subsection (5) contains the proviso that required the Commissioner to be satisfied that the supplier was merely disbursing as an agent. If a court reads (5A) as still subject to that requirement, the deeming rule could be argued to add nothing. The more natural reading, and the one KRA’s guidance and most commentary appear to adopt, is that the deeming language settles the point for employee-related costs. But the drafting leaves room for dispute, and we have not found a court decision on it. Suppliers relying on the VAT rule on outsourced staff for large volumes should consider seeking a private ruling from the Commissioner.

Who should care

The VAT rule on outsourced staff matters most to BPO and shared-services operators, security and cleaning contractors, IT staffing firms, payroll outsourcers and employee placement agencies, and to the corporates and multinationals that buy those services. For businesses setting up in Kenya, see our guide to setting up a BPO or shared services operation.