A question we often get at Seal Associates is: “What happens to VAT when a company keeps buying goods or services but isn’t selling anything?”
The short answer: input VAT can pile up, and it may not be recoverable unless the business is making taxable or zero-rated supplies. Here’s the breakdown.
Why this happens
VAT is designed to tax consumption, not investment. When a business is buying supplies or assets but not generating sales, the input VAT keeps increasing while output VAT remains low or zero. Over time, this creates a VAT credit on the books.
How the Kenya Revenue Authority (KRA) handles it
- Excess input VAT is carried forward indefinitely in iTax.
- VAT is not automatically refunded.
- Refunds are only available in specific circumstances, such as zero-rated supplies like exports or certain donor-funded projects.
If a business never makes taxable supplies, the VAT credit effectively becomes “stranded” — it cannot be converted into cash and becomes a real cost. During audits, KRA may also scrutinize whether the purchases were genuinely for taxable business activities.
Who this affects most
- NGOs and donor-funded projects
- Startups still in the setup phase
- Capital-intensive businesses investing before revenue begins
Key takeaway
VAT planning is crucial. If there’s no clear route to taxable or zero-rated supplies, accumulating VAT will not turn into cash; it will simply sit on the ledger. Before making significant procurement decisions, always assess your potential for VAT recovery.
At Seal Associates, we advise clients to consider VAT implications early in their planning – it can save both cash flow headaches and compliance issues down the line.
Posted by Godfrey Ndegwa
SEAL ASSOCIATES
Certified Public Accountants
Godfrey Ndegwa: +254 (713) 281290
Paul Githuku: +254 (784) 653085
Email: info@sealassociates.com
Office: 1st Floor, Woodvale Place, Woodvale Grove Rd, Westlands, Nairobi
Website: https://sealassociates.com/