Finance Act 2026 Exempts Repossessed Asset Sales from VAT: Resolution of a Banking Sector Tax Dispute With Immediate Compliance Implications

The Finance Act 2026 has amended Part Two of the First Schedule of the VAT Act to exempt from VAT the sale, disposal, or realisation of collateral, repossessed assets, and secured property arising from the enforcement of loan security. The amendment directly overturns the practical effect of a January 2025 Tax Appeals Tribunal ruling that had required KRA to continue collecting 16% VAT on repossessed asset disposals, on the basis that the recovery process was not explicitly covered by the existing financial services exemption. The Kenya Bankers Association had lobbied against the VAT charge, arguing that loan recovery is not a profit-making activity and that the tax burden would ultimately be passed to borrowers through higher credit costs. For compliance officers, tax teams, and legal counsel in banks, SACCOs, and other lending institutions, the exemption is effective from the date of assent June 23, 2026 and requires immediate review of VAT accounting treatment for ongoing and future repossessed asset disposals.

The dispute over VAT on repossessed asset sales has been running between Kenya's lending sector and KRA for several years, crystallising in a January 2025 Tax Appeals Tribunal decision that drew a distinction between the principal loan transaction exempt as a financial service and the recovery process through seized or repossessed property, which the Tribunal found was not explicitly covered by the exemption. That ruling left banks, SACCOs, and other lenders exposed to a 16% VAT charge on every repossessed asset disposal, a cost the Kenya Bankers Association argued distorted the economics of secured lending and would ultimately be absorbed by borrowers.

The Finance Act 2026 resolves the dispute legislatively rather than through further appeals litigation. By amending the VAT Act's First Schedule to explicitly include the sale, disposal, or realisation of collateral and repossessed assets within the financial services exemption, the government has settled the legal question in the sector's favour. The amendment is effective from June 23, 2026, the date of Presidential assent.

VAT in Kenya is governed by the VAT Act 2013, which distinguishes between taxable supplies subject to VAT at the standard 16% rate, zero-rated supplies, and exempt supplies on which no VAT is charged and no input VAT credit is available. Financial services have historically been exempt under Part Two of the First Schedule, on the basis that intermediation taking deposits and making loans is not a value-adding commercial activity in the conventional VAT sense. The dispute with KRA arose because the VAT Act's financial services exemption, as originally drafted, covered the making of advances and granting of credit but did not expressly address the downstream enforcement of security . The process by which lenders recover value from defaulting borrowers by selling charged assets.

KRA's position, upheld by the Tax Appeals Tribunal in January 2025, was that a lender selling repossessed property is effectively making a taxable supply of goods, separate from the exempt financial service of lending. The Tribunal's ruling was technically defensible on the text of the pre-amendment VAT Act, but it created an anomaly: the loan was exempt, but the recovery of the loan through the very security that made it viable was taxable. The Finance Act 2026 amendment closes that gap by bringing the entire loan enforcement chain including collateral realisation within the financial services exemption.

The practical compliance implications of the amendment require immediate attention from tax and finance teams across the lending sector. Banks, SACCOs, and other lenders that have been accounting for and remitting 16% VAT on repossessed asset disposals since the January 2025 Tribunal ruling need to recalibrate their VAT treatment immediately. Going forward, disposals of repossessed assets are exempt supplies no output VAT should be charged or remitted. However, the exemption also means that input VAT on costs directly attributable to repossessed asset management and disposal storage, valuation, legal fees, auction costs is not recoverable, since exempt supplies do not generate input VAT credit entitlement. Tax teams should model the net VAT position carefully, as the removal of output VAT exposure may be partially offset by the loss of input VAT recovery on directly attributable costs.

The more complex question is whether lenders who have remitted VAT on repossessed asset disposals since the Tribunal ruling can recover those amounts from KRA as overpayments. The Tax Procedures Act 2015 provides a mechanism for VAT refund claims, but the position is complicated by the fact that the Tribunal ruling itself validated KRA's collection of that VAT under the pre-amendment law. Whether the legislative amendment operates prospectively only, or whether it supports a retrospective refund argument for VAT remitted after the Tribunal ruling, is a question that will require careful legal analysis and likely direct engagement with KRA. The Kenya Bankers Association and individual institutions with material VAT exposures from the Tribunal period should seek legal counsel on this point promptly.

The amendment also has credit market implications. KBA's argument that VAT on repossessed asset sales would increase the cost of secured lending was accepted as a policy rationale by the National Assembly. The exemption removes a cost distortion that had begun to affect how lenders priced secured credit and structured loan recovery procedures. Lenders that had adjusted credit pricing or recovery workflows to account for the VAT liability should review those adjustments now that the exemption is in place.

The Finance Act 2026 VAT exemption for repossessed asset disposals is a clean legislative resolution to a dispute that had introduced a genuine cost distortion into Kenya's secured lending market. The compliance response is straightforward going forward but the retrospective question of whether VAT remitted under the Tribunal ruling is recoverable is material, legally complex, and worth pursuing with proper advice. Institutions that move quickly on both points will be better positioned than those that treat the amendment as simply closing a chapter.