Kenya excludes pass-through employee costs from the taxable value of outsourcing
This page records one dated change. For the rules in Kenya as they stand today, see the Kenya guide →
- Jurisdiction
- 🇰🇪 Kenya
- Tax
- VAT
- Change type
- Update
- Status
- In force
- Impact
- Action required
- Announced
- 23 June 2026
- Effective
- 1 July 2026
- Instrument
- KE-FINACT-19-2026
- Authority
- National Council for Law Reporting (Kenya Law)
- Systems
- Tax engine, ERP, Invoicing
- Verified
- Corroborated against official id · medium confidence
Suppliers of labour, outsourcing and employee placement services in Kenya, and their clients — particularly clients who cannot recover input tax.
Reconfigure VAT invoicing for Kenyan labour-outsourcing and staffing engagements so that only the service fee or margin is subject to VAT, excluding pass-through employee costs.
Tax engineERPInvoicing
Kenya’s Finance Act, 2026 (Act No. 19 of 2026, signed into law on 23 June 2026) inserts subsections (5A) and (5B) into section 13 of the VAT Act, CAP 476. Where a supplier of labour, outsourcing or employee placement services incurs employee-related costs such as salaries, wages and statutory deductions, those costs are deemed to be disbursements made on behalf of the client and are excluded from the taxable value of the supply, so VAT applies only to the supplier’s service fee or margin.
What changed in detail
Kenya’s Finance Act, 2026 (Act No. 19 of 2026), signed into law on 23 June 2026, inserts subsections (5A) and (5B) into section 13 of the VAT Act, CAP 476, with effect from 1 July 2026.
Where a supplier of labour, outsourcing or employee placement services incurs employee-related costs such as salaries, wages and statutory deductions, those costs are deemed to be disbursements made on behalf of the client and are excluded from the taxable value of the supply. VAT therefore applies only to the supplier’s service fee or margin.
What it means
This is the commercially significant one of the four Finance Act VAT changes. It removes VAT from the payroll pass-through that dominates the value of a staffing invoice, which materially changes pricing for clients who cannot recover input tax — a hospital or an insurer buying outsourced staff sees a real reduction, not a timing difference. The invoice has to separate the pass-through from the fee for the treatment to hold, so the billing template is the thing to change first.