High Court rules on principal supplier status for VAT purposes in digital platform services

In Commissioner of Domestic Taxes v Sendy Limited (Income Tax Appeal No. E137 of 2024), the High Court delivered a significant judgment with far‑reaching implications for the VAT treatment of services facilitated through digital platforms in Kenya. The central issue before the Court was whether a digital platform that controls pricing, allocates service providers, and manages payment flows should be regarded as the principal supplier for VAT purposes, or merely as a commission earning intermediary. The decision also addressed the VAT treatment of Requests for Payment (RFPs) under the Value Added Tax Act, Cap 476 (“VAT Act”), and the legal effect of private rulings issued by KRA.

Background

Sendy Limited (Sendy) operated a digital marketplace platform that connected customers seeking delivery and transportation services with independent third‑party transporters. Following a tax audit initiated on 1 November 2021, the Kenya Revenue Authority (KRA) issued additional VAT and Corporation Tax assessments, citing discrepancies between Sendy’s declared turnover and its bankings.

Sendy objected to the assessments. While the Corporation Tax assessment was vacated, the VAT assessment was upheld. KRA took the position that Sendy was liable to account for VAT on the full delivery charges paid by customers, rather than only on the commissions earned. Sendy appealed to the Tax Appeals Tribunal (TAT), which found in its favour, holding that Sendy was not a transport service provider but merely a platform operator. Dissatisfied with the Tribunal’s decision, the KRA appealed to the High Court, arguing that the Tribunal failed to properly consider the economic reality of the transactions.

Kenya Revenue Authority’s Position

The KRA argued that Sendy exercised control over the essential elements of the transport service and should therefore be treated as the principal supplier for VAT purposes. In particular, the KRA contended that Sendy controlled the customer relationship through its application and brand, determined pricing, dispatched drivers through its algorithm, issued Request for Payment demanding payment, and collected the full consideration directly into its bank accounts before remitting payouts to drivers as a cost of sale. On this basis, KRA argued that VAT was chargeable for the full consideration under section 5(1) of the VAT Act. The KRA further submitted that RFPs issued by Sendy functioned as tax invoices within the meaning of section 42 of the VAT Act.

Sendy Limited’s Position

Sendy maintained that it operated solely as a technology platform facilitating interactions between customers and independent transporters. It argued that it earned commission income from transporters and that VAT was therefore chargeable only on that commission.

Sendy relied on a private ruling issued by the KRA on 30 June 2020, which confirmed that transporters were responsible for accounting for VAT on transport services, while Sendy was required to account for VAT on commissions earned. Sendy argued that the ruling was binding on KRA under section 65(4) of the Tax Procedures Act, Cap 469A (TPA).

Sendy also raised a preliminary objection on jurisdiction, contending that the High Court’s jurisdiction under section 56(2) of the TPA is limited to questions of law, and that the Tribunal’s findings were factual in nature.

The High Court’s determination

The Court held that the appeal raised questions of law, including the correct legal characterisation of the supply and the status of Requests for Payment (RFPs) under the VAT Act. Applying a substance-over-form analysis, the Court found that Sendy exercised decisive control over the essential elements of the delivery service and therefore acted as the principal supplier for VAT purposes.

In reaching this conclusion, the Court emphasised that VAT liability turns on economic and commercial reality rather than contractual labels or asset ownership. It identified several indicators of principal supplier status, including control over pricing, algorithmic allocation of drivers, authorisation of delivery, issuance of RFPs demanding payment in Sendy’s own name, and the collection of the full consideration directly into Sendy’s bank accounts. Payments subsequently made to drivers were characterised as a cost of sale rather than remittance of funds belonging to third parties.

The Court further clarified that while RFPs may not be labelled as tax invoices, their legal significance lies in demonstrating who authorises and demands payment from the customer. Where a platform controls the billing process and requires customers to pay it directly, such documents reinforce the conclusion that the platform, and not the underlying service provider, is the supplier for VAT purposes.

Drawing on persuasive international jurisprudence, including the European Union’s deemed supplier doctrine and cases such as Asociación Profesional Elite Taxi v Uber Systems Spain SL and Fenix International Limited v HMRC (Case C-434/15), the Court observed that platforms which control the key aspects of a transaction are deemed suppliers liable to account for VAT on the full consideration paid by customers. The Court noted that in the digital economy, control over data, networks, and transaction flows may be more significant than ownership of physical assets.

Regarding the private ruling issued on 30 June 2020, the Court acknowledged that such rulings are administratively binding on KRA under section 65(4) of the Tax Procedures Act. However, it stressed that a private ruling cannot override the correct statutory interpretation by a court of competent jurisdiction. While legitimate expectations may arise against the tax authority administratively, they do not estop a court from determining VAT liability in accordance with the law.

The Court allowed the appeal, set aside the Tribunal’s decision, and upheld the Objection Decision confirming VAT of KES 82,248,150.74.

Key Takeaways and Implications

The judgment clarifies that digital platforms operating in Kenya may be treated as principal suppliers for VAT purposes where they control pricing, service allocation, contractual terms, and payment collection, making them liable for VAT on the full customer consideration. It also confirms that functional documents such as RFPs may qualify as demands for payment for VAT purposes, and that private rulings cannot override statutory interpretation by the courts. Given its potential sector-wide impact, platforms involved in multi-party transactions should review their contractual, billing, and VAT compliance structures, as the decision may set an important precedent unless stayed or overturned on appeal.

If you have any queries relating to the above or any aspect of this Article or Tax Compliance, please do not hesitate to contact James Wairoto and Veronicah Mutua. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.