Apportioning input tax for mixed supplies
How a firm handles a Kenyan client's input tax when it makes both taxable and exempt supplies, given that KRA's auto-populated return does not apportion.
By Achekam · · 5 min read · For Accountants & audit firms in Kenya
Picture a private school whose tuition is an exempt supply, which also runs a uniform shop that makes taxable sales. Or a property company with some lettings that are exempt and some that are taxable, in the same building. Each pays VAT on rent, electricity, security, software and professional fees, and each needs an answer to the same question: how much of that VAT can it claim back?
The answer is rarely "all of it" and rarely "none". It depends on what each purchase is used for, and KRA's systems will not work it out for the client. This article explains the rules KRA describes, how the auto-populated return handles mixed businesses, and how a firm can set and apply a defensible method.
Why exempt sales block input tax
KRA describes two VAT rates for Kenya: 16%, the general rate on taxable goods and services other than zero-rated supplies, and 0% on the supplies listed in the Second Schedule to the VAT Act, 2013. Exempt supplies are different. KRA says they are listed in the First Schedule, they are not taxable supplies, and their related input tax is not deductible.
KRA states the principle from the claiming side too. Only VAT-registered businesses can claim input tax, and only on purchases used in making taxable supplies. KRA also says input tax cannot be claimed on purchases not related to the business, on purchases relating to exempt sales, or on restricted items such as passenger cars for personal use and entertainment, unless provided in the ordinary course of business. Where a purchase is used for both business and personal purposes, only the business-use portion of the VAT can be claimed.
So for the school in the example, VAT on stock for the uniform shop relates to taxable sales and is claimable. VAT on textbooks bought for teaching relates to exempt tuition and is not. VAT on the electricity bill for the whole campus relates to both, and that is where apportionment comes in. Which supplies are exempt in the first place is covered in exempt supplies under Kenyan VAT, and the separate list of blocked purchases in input VAT on blocked purchases.
The auto-populated return does not apportion for you
The auto-populated return arrives with purchases already filled in, and it is tempting to accept them as the claim. For a mixed business, that would be wrong. KRA says the auto-populated VAT return does not apportion input tax automatically when a business has both taxable and exempt sales. The taxpayer must either disallow invoices or use the apportionment fields in the tax due sheet.
KRA explains how the pre-filled return works, what a VAT-registered business must do to confirm it, and how to check an invoice is TIMS/eTIMS compliant, in its questions on the auto-populated VAT return.
Two ways to reduce the claim
| Approach | When it fits |
|---|---|
| Disallow specific invoices | Purchases used wholly for exempt supplies, such as the school's teaching materials |
| Use the apportionment fields | Purchases used for both, such as shared rent, utilities and overheads |
Most mixed businesses need both: invoices that relate wholly to exempt activity are disallowed outright, and the shared costs go through the apportionment fields.
Documenting a consistent method
A defensible apportionment rests on three steps, done the same way every period:
- Attribute directly where you can. Sort purchases into those used only for taxable supplies (claim in full), those used only for exempt supplies (disallow) and those used for both (residual).
- Apportion the residual. Split the shared input tax between taxable and exempt use using the method the VAT legislation provides, and confirm that method from the Act and its regulations before applying it.
- Write it down. Record the method, the data used and who approved it, in a short memo kept with the VAT file.
Consistency matters as much as precision. A method that changes month to month without explanation is harder to defend than one applied steadily. When the client's activities change, such as a school opening a new taxable service, revisit the memo.
Timing also matters for the taxable share: a claim has to fall within KRA's window for input tax, discussed in the six-month window for input tax.
Preparing the return in Achekam
Achekam computes a client's Kenyan VAT return from imported sales and purchase schedules, because the client's own books are not linked to it. For a mixed business, the purchase schedule is where the attribution work shows: lines relating wholly to exempt supplies can be excluded before import, and the shared costs identified for apportionment.
Staff open a Kenyan tax profile for the client and start returns that move through prepare, review and approve by different people. The client's sales and purchase lines are typed in, payments are recorded with KRA's reference and confirmed by another person, and Achekam does not pay the tax.
The separation of roles suits apportionment well. A Kenyan return in Achekam is prepared by one person, reviewed by a second and approved by a third, after which its rule snapshot and figures are frozen. An amendment becomes a new version, so nothing is overwritten. The reviewer is the natural person to check the apportionment against the memo before the return is approved.
An annual true-up check
Month by month, the residual split is applied to that month's figures. At the year end, it is good practice to look at the year as a whole:
- Compare the year's taxable and exempt activity with the monthly assumptions.
- Check whether any purchase treated as residual turned out to be used wholly for one side.
- Confirm the memo still describes what the client actually did.
- Agree with the client how any correction will be handled in the next return, within the legislation's rules.
Before the next return
For each client with exempt income, ask for a one-page memo describing the apportionment method. If there isn't one, write it with the client before the next return is prepared.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
