In Kenya’s evolving financial landscape, the VAT treatment of repossessed goods is becoming an increasingly important issue. As asset-backed credit gains traction, particularly in motor vehicle finance, equipment leasing, and consumer lending, questions are emerging on how VAT should apply when lenders recover and resell financed goods after borrower default.
At the heart of the debate lies a distinction between the provision of credit, which is VAT-exempt under Kenyan law, and the resale of repossessed assets. Historically, lenders have viewed repossession and resale as part of the broader credit process. However, in recent years, the Kenya Revenue Authority (KRA) has increasingly taken the view that such resales constitute taxable supplies, requiring financiers to charge and remit VAT on the proceeds. This position has introduced a layer of complexity for secured lenders. Typically, in an asset finance arrangement, the financier retains a security interest, not ownership, over the financed goods. When a borrower defaults, the asset is repossessed and resold purely to recover outstanding amounts. Many stakeholders argue that such recovery actions are not equivalent to ordinary commercial transactions, and that treating them as taxable supplies adds compliance burdens and costs.
Another challenge lies in the treatment of input VAT. As the initial credit transaction is VAT-exempt, financiers generally cannot recover input VAT on costs incurred. If the resale of the asset is treated as taxable, this creates a mismatch: output VAT must be accounted for, but related input VAT is irrecoverable. This is particularly problematic in high-volume, low-margin sectors such as motorcycle and electronics financing, where resale values are often modest. Other jurisdictions have taken steps to address similar issues. In South Africa, repossession is treated as a taxable supply by the borrower to the financier, enabling the financier to recover input VAT on resale. In the United Kingdom, VAT guidance allows certain recovery and enforcement activities connected to exempt financial services to follow the VAT treatment of the main service. These models aim to ensure VAT neutrality and reduce distortion in secured lending markets.
In Kenya, the issue was considered during the legislative review of the Finance Bill, 2025. A proposal to provide certainty on the VAT treatment that has historically applied to repossessed goods in practice was included in early versions of the Bill. As we await determination of whether this proposal will be legislated, the proposal marked a recognition of the growing concern among financiers and tax practitioners. The matter remains unresolved. In the meantime, financiers must navigate an uncertain landscape shaped by administrative interpretation and potential litigation. As the credit market continues to evolve, aligning tax policy with commercial reality will be key. Balanced reform, whether legislative, regulatory, or administrative, can help promote clarity, fairness, and financial inclusion in Kenya’s economy.
If you wish to discuss these topics, please contact:
Viva Africa Consulting LLP (WTS Kenya)
