Legal Advisory On The Vat Implications Of Sale Of Seized Property Through Auction - Kcb Bank Kenya Limited V Commissioner Legal Services & Board Coordination (tax Appeal E023 Of 2024) [2025]

Introduction

The Tax Appeals Tribunal was recently confronted with the question of whether the sale of seized motor vehicles through auction by KCB Bank to recover bad debts is subject to VAT.
The Tribunal in its decision held that, unless explicitly exempted under the VAT Act, such transactions are taxable supplies under the VAT Act.
This advisory aims to provide a comprehensive analysis of the decision and its implications for future transactions involving the sale of seized assets.

Case Summary
The Kenya Revenue Authority (KRA) conducted an audit for KCB Bank for the period between 2018 and 2022, during which it issued assessments. A primary issue for determination in the appeal was whether the sale of motor vehicles, which had been seized by the bank due to loan defaults and subsequently sold through auction, was subject to VAT.

KCB’s Submissions:
The bank argued that the sale of seized vehicles through auction is a natural consequence of the bank’s role in providing credit and securing loans with vehicles. In its submission, the bank emphasized that the disposal of such vehicles is not intended to generate profit but rather to recover unpaid loan amounts from the defaulting borrowers. The sale price is set to cover the outstanding loan balance, and any proceeds above the loan amount would be returned to the debtor.
The bank maintained that VAT is not applicable to this transaction, as the sale of the vehicles through auction is intrinsically linked to the provision of credit, which is an exempt financial
service under the VAT Act. The bank cited previous cases, including Federal Bank Limited v. State of Kerala [2003], to argue that the bank’s actions were similar to those of a bailee, where the bank holds the seized property as security until the debt is paid.
The bank further relied on Mayfair Insurance Company Limited v. Commissioner of Domestic Taxes (TAT No. 47 of 2016), where the Tribunal ruled that the sale of salvaged insurance goods is part of the provision of insurance services, not the supply of goods for VAT purposes. The bank argued that its role in selling seized assets should be treated similarly to the insurance sector's sale of salvaged goods.

KRA’s Case:
In contrast, the KRA argued that the sale of seized motor vehicles constitutes a taxable supply of goods under the VAT Act. The KRA noted that, although the bank may hold a special right of repossession over the vehicles, the sale is made by the bank, a VAT-registered entity, to a third-party purchaser. The KRA further emphasized that there is no specific exemption under the VAT Act for sales of this nature. As such, KCB was required to remit VAT on the sale.

Analysis and Tribunal’s Findings:
The Tribunal considered the submissions of both parties and reviewed the relevant provisions of the VAT Act. It found that Part 2 of the First Schedule, Paragraph 1(h) of the VAT Act
exempts “the making of any advances or the granting of any credit” from VAT, but it does not extend to the recovery of credit through the sale of assets. The Tribunal determined that the disposal of seized vehicles through auction was not a direct extension of the exempt financial service of granting credit, but a separate transaction that falls within the taxable category of a supply of goods.
The Tribunal clarified that the sale of seized motor vehicles through auction is a “hostile sale,” where the creditor (in this case the bank) exercises a right of sale on behalf of the debtor to recover the debt. Consequently, the bank, as the creditor, is considered the seller under VAT law, and the transaction is subject to VAT. The Tribunal emphasized that tax laws must be interpreted strictly, and as no provision under the VAT Act exempts such sales, the bank was obligated to charge and remit VAT on the transaction.

Conclusion and Implications of the Judgment
While the decision is subject to appeal in the High Court, it is important for financial institutions to be aware that this judgment represents the current legal position. Banks and
financial institutions should adjust their internal processes to ensure that VAT is charged on sales of seized assets. This may involve updating invoicing systems, ensuring VAT is included
in the sale price, and remitting the VAT to the KRA.
This however does not apply to the sale of residential premises as the VAT Act exempts the supply by way of sale, renting, leasing, hiring, letting of land or residential premises;
“residential premises” means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation.

Exposure
Section 31 of the Tax Procedures Act provides that the Commissioner can issue an additional assessment within five years of the date that the self-assessment taxpayer submitted the selfassessment return to which the self-assessment.
Flowing from the Judgment that VAT is chargeable on sale of seized assets, the Commissioner may proceed to issue additional assessments to banks and financial institutions for unpaid
VAT for the sale of seized assets, but limited to the 5-year period.

How We Can Assist
At CM Advocates LLP, our tax team is dedicated to guide you on transactions that require compliance with the judgment and represent you in assessments that may be issued by the
Commissioner relating to unpaid VAT on seized assets.