What Has Changed?
The Finance Act, 2026 amended Section 13 of the VAT Act by introducing new subsections 13(5A) and 13(5B).
Where a supplier provides labour, outsourcing or employee placement services and incurs employee-related costs, those costs are now deemed to be disbursements made by the supplier on behalf of the client.
What Counts as Employee-Related Costs?
Employee-related costs include:
- Salaries.
- Wages.
- Statutory deductions.
- Other related employee costs.
What Does This Mean for VAT?
These qualifying employee-related costs are excluded from the taxable value of the supply.
Therefore, VAT applies to the service fee or margin charged by the supplier, rather than to the employee-related costs themselves.
Simple Example
A labour outsourcing company incurs:
- Employee costs: KES 1,000,000
- Service fee: KES 100,000
Under the new provision, the KES 1,000,000 employee-related costs are treated as disbursements, while the KES 100,000 service fee or margin forms part of the taxable value.
Why This Matters
The amendment provides clearer VAT treatment for labour outsourcing and employee placement arrangements.
Suppliers should separately identify qualifying employee-related costs and the service fee or margin in their contracts, invoices and accounting records.
Key Takeaway
For qualifying labour outsourcing and employee placement services, VAT is applied to the supplier’s service fee or margin, while qualifying employee-related costs are treated as disbursements.
Effective date: 1 July 2026.
Source: Finance Act, 2026 — Section 13(5A) and 13(5B), VAT Act.
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