What Has Changed?
The Finance Act, 2026 amended Section 13(6)(a) of the VAT Act concerning the treatment of financial charges under hire purchase agreements.
Previously, financial charges relating to the supply of credit under a hire purchase agreement were excluded from the taxable value of the supply.
The Finance Act, 2026 has restricted this exclusion.
When Is the Financial Charge Excluded?
The financial charge is excluded from the taxable value only where:
- The supplier is licensed to carry on hire purchase business under the Hire Purchase Act; and
- The hire purchase agreement is registered in accordance with the Hire Purchase Act.
What Does This Mean?
If a business conducts a hire purchase transaction but does not meet these requirements, the financial charge may form part of the taxable value of the supply and therefore be subject to VAT.
Simple Example
A licensed hire purchase business sells equipment under a properly registered hire purchase agreement:
- Price of equipment: KES 1,000,000
- Financial charge: KES 100,000
Where the hire purchase requirements are met, the KES 100,000 financial charge is excluded from the taxable value.
What Businesses Should Do
Businesses offering credit or instalment arrangements should confirm whether their arrangements legally qualify as registered hire purchase transactions.
They should also review their licensing status, agreement documentation, registration records and VAT treatment of related charges.
Key Takeaway
The VAT exclusion for hire purchase financial charges is now conditional on both licensing under the Hire Purchase Act and registration of the hire purchase agreement.
Source: Finance Act, 2026 — Section 13(6)(a), VAT Act.
TAX HOME KENYA
Simplifying Your Tax Journey.
📱 Call/WhatsApp: +254 725 416 982
📧 taxhomekenya24@outlook.com