We cannot tax anything and everything: Kenya’s High Court confirms Sports Clubs’ fees are exempted from Value Added Tax

Kenya has been faced with protests for the past two months over an unpopular and contentious Finance Bill, 2024 which has not only led to the deaths of protesters, but also part of the parliament building set alight.

Thousands have taken to the streets of Nairobi and several other cities during protests, as an online movement led by the youth developed into a major headache for the Kenyan government. The Finance Bill, 2024 sought to impose unaffordable tax rises on ordinary citizens and businesses already weighed down by the high cost of living in Kenya.

In a perceived reading of the country’s temperature on objections to tax increases, the High Court has recently upheld the decision of the Tax Appeals Tribunal (the Tribunal) affirming that membership subscription fees and membership entrance fees of golf clubs and sports clubs are exempt from Value Added Tax (VAT). The High Court deliberated extensively on whether the provision of recreation facilities by these clubs constitutes a business activity and whether such services should be classified as taxable supplies.

Background of the Dispute

Commissioner of Domestic Taxes v Sigona Golf Club and others, Income Tax Appeal No. E043 of 2020

The dispute arose when the Kenya Revenue Authority (KRA) from 2017 demanded remittance of VAT on the membership subscription fees and member entrance fees from Sigona Golf Club, Thika Golf Club, Kiambu Club Limited, Ruiru Sports Club and Kenya Golf Federation (the Respondents) despite the fees being VAT exempt under the Value Added Tax Act, 2013 (the VAT Act). The Respondents objected the demands and responded that they were member welfare clubs offering physical and health services to members in terms of playing golf and in no way were businesses. However, the Respondents’ objections were overruled by the Commissioner of Domestic Taxes.

Appeal at the Tribunal

Tax Appeal Tribunal No.132, 148, 149 and 151 of 2017 

The Respondents appealed the taxman’s decision to the Tribunal arguing that taxation of the subscription and membership fees fell outside the ambit of the Value Added Tax Act, 2013 (the VAT Act). The Respondents further supplemented their position with the Public Notice No.20 of 2001 wherein entrance and subscription fees were exempted from VAT. KRA on the other hand contended that the notice was issued under the repealed Value Added Tax Act, Cap 476, Laws of Kenya. Additionally, KRA submitted that the entrance and membership fees were neither zero rated nor exempt from VAT under the VAT Act, hence they were taxable supplies subject to VAT at the standard rate. The Tribunal in finding that the Respondents’ appeal had merit held that the membership and subscription fees of the Respondents were exempt from VAT, and that that KRA cannot act as a bystander in effecting policies on matters tax as it is the key institution so mandated.

The High Court Appeal

Aggrieved by the Tribunal’s decision, KRA filed an appeal in the High Court against the Respondents seeking to set aside the Tribunal’s judgment and substitute it with a judgment upholding its tax demands. 

KRA argued that the Respondents charged subscription fees and entrance fees as consideration for the members to be able to access the facilities as such, it was the amounts therein that are taxable value.

The Respondents on the other hand contended that they promote the game of golf and other sporting activities which fall under the ambit of “hobby or leisure activity” category hence, it was not a taxable supply. They further argued that KRA’s reasoning that the subscription and entrance fees are consideration for trade purposes was unsound, since the fees charged were used for maintenance of the facilities.

The High Court found that Public Notice No. 20 of 2001 clarified the legally existing exemption of entrance fees and members’ subscription fees from VAT based on their character and nature. In its holding the Court found that the enactment of the VAT Act in 2013 did not take away the exemption nor did it impose VAT on the fees as had it intended to do so, it would have done so expressly. The Court also found that since 2001, there had been no subsequent notice revoking the Public Notice.

The Court also delved into the principle of legitimate expectation in tax law, drawing from the precedent set by the Kenya Revenue Authority v Export Trading Company Limited (Petition 20 of 2020) [2022] KESC 31 (KLR) (Civ) (17 June 2022) (Judgment). The Court noted that the Respondents had a legitimate expectation that based on the VAT Act and Public Notice No. 20 of 2001 that joining, entrance and subscription fees were exempt from VAT and emphasized that KRA could not impose tax obligations in a clandestine or stealthy manner without prior notification of their intentions. Furthermore, the Court underscored that any withdrawal of a legitimate expectation should not be done casually but should involve consultation and engagement with affected stakeholders, which KRA appeared to have bypassed. 

The High Court remarked that while the courts will facilitate legitimate collection of taxes for the economy, at the same time they have the responsibility to guard against overzealousness, greed, unfairness, and unconscionableness in tax collection. 

The Court added that while taxes are an inevitable and legitimate source of government revenue, “we cannot tax anything and everything.” The Court also advised that a tax authority should, in carrying out its functions not take an unpopular and insensitive trajectory that makes tax and tax collection a bitter pill to swallow; or wholly disregards or rubbishes the views of stakeholders and even the concerned public.

Conclusion

This decision solidifies the exemption of membership and entrance fees in golf and sports clubs from VAT. Further, this decision emphasizes the crucial requirement for transparency in tax administration to prevent taxation through dubious interpretations or the imposition of illegal taxes. The manipulation of tax laws or any other legislation through crafty interpretation is strongly discouraged, as it creates an unfavourable, uncertain, and stifling environment that hinders business growth and development.

The decision comes on the back of the parliamentary session of the National Assembly where a Committee of the Whole House voted in agreement with President William Ruto's reservations and recommendations to delete all clauses of the Finance Bill, 2024. The President’s decision came after an array of protests across the country, primarily led by Kenyan youth, who claim the punitive tax proposals will burden an already stretched population. The Government now faces the decision of whether to reintroduce similar tax measures in the upcoming financial year or abandon these proposals altogether, including the controversial VAT exemption for entrance and membership fees.

For more information please contact the authors George Ndung’u, Betty Bundi and Milton Kimotho.