Landlords who let shops, offices and warehouses must think about VAT, which long-term residential landlords do not. Getting this wrong can mean a bill for tax you did not charge your tenants, so it is worth understanding before you sign a commercial lease.

Residential versus commercial

  • Residential rent is exempt from VAT. You do not charge it, and you cannot claim VAT on costs related to it.
  • Commercial rent is a taxable supply, standard-rated at 16%. If you are VAT-registered, you charge VAT on top of the rent and pay it to KRA.

A building with both kinds of tenant has both kinds of income, and costs shared between them must be split.

When you must register

You must register for VAT when your taxable supplies reach KES 5 million in any 12-month period. If your commercial rent alone is KES 450,000 a month, you will pass the threshold in under a year. The VAT registration checker tells you where you stand. You may register earlier by choice, which can help if you have big costs on which you want to claim VAT back.

How it works once you are registered

  1. Add 16% VAT to the rent on your invoices. A rent of KES 200,000 becomes KES 232,000, with KES 32,000 of VAT.
  2. Issue a valid tax invoice, through eTIMS; see eTIMS e-invoicing explained.
  3. File a VAT return and pay by the 20th of the following month.
  4. Claim input VAT on expenses that relate to the commercial rent, such as repairs and security, using valid invoices that show your PIN.

The VAT calculator adds or removes VAT from any amount, and the VAT return calculator shows the output less the input.

Tenants and VAT

Commercial tenants that are VAT-registered can claim the VAT you charge them as input VAT, so the cost to them is the rent, not the rent plus VAT. If your tenant is not registered, the VAT is a real cost to them, which can affect your pricing and your ability to let.

Withholding

Commercial tenants who are withholding agents may withhold income tax from the rent as well. That is separate from VAT; see withholding tax on rent.

Records for VAT

Keep a register of invoices issued and of the VAT charged and claimed. The VAT returns register follows the year's returns and carries credits forward, and the VAT input invoice register lists the purchase invoices behind your claim. Our guide to filing a VAT return takes you through the iTax steps.

Income tax is separate

VAT is a tax on the supply, while the rent itself is also income for income tax. If you are registered, the income tax is calculated on rent net of VAT. Read monthly rental income tax or annual tax for the income tax side of residential lets.

Before you sign a commercial lease

State clearly in the lease whether the rent is exclusive or inclusive of VAT, and who pays VAT on service charges. An unclear clause is a common source of dispute.

Rates and thresholds are set by the VAT Act and revised by Finance Acts. Confirm them with KRA or a registered tax agent.