Tax Appeals Tribunal Clarifies the Tax Treatment of Service Charges and Pass-Through Funds
The Tax Appeals Tribunal has delivered an important decision concerning the treatment of service charges and member contributions collected by property management companies for Income Tax and VAT purposes. In Nextgen Mall Management Company Limited v Commissioner of Legal and Board Services, Tax Appeal E1498 of 2025, delivered on 27 July 2026, the Tribunal considered whether service charges collected from property owners constituted taxable income and whether the same amounts constituted consideration for a taxable supply subject to VAT.
The dispute involved tax assessments totalling KShs. 119,873,193, comprising KShs. 38,550,556 in Income Tax and KShs. 81,322,637 in VAT.
Background of the case
Nextgen Mall Management Company Limited was established to manage the common areas of Nextgen Mall along Mombasa Road, Nairobi, on behalf of purchasers of units within the development. The company collected service charges and member contributions from the unit owners. The funds were applied towards common-area expenses, including utilities, garbage collection, security, repairs and other related expenses.
KRA selected the company for audit after noting that it was declaring income in its Income Tax returns while remaining unregistered for VAT. Following the audit, KRA raised additional Income Tax and VAT assessments for the relevant years. The taxpayer challenged the assessments, ultimately bringing the dispute before the Tax Appeals Tribunal.
The Issues Before the Tribunal
The Tribunal identified two principal issues: Whether the service charges and member contributions constituted income chargeable to Income Tax; and Whether the service charges and member contributions constituted consideration for a taxable supply chargeable to VAT.
Tribunal Finds Service Charges Were Pass-Through Funds
The Tribunal’s analysis focused on the actual nature of the funds rather than merely the fact that the taxpayer had received them. The evidence showed that the service charges were collected pursuant to contractual arrangements requiring unit owners to contribute towards the costs of maintaining the common areas.
The Tribunal further found that professional property managers, including Davita Management Limited, Broll Kenya Limited and RDL Property Managers Limited, were responsible for performing the actual management functions. Their services were invoiced separately and subjected to VAT. The Tribunal therefore concluded that the management company was effectively acting as a conduit through which the owners pooled and disbursed their funds.
It found that the company did not add a margin or retain the service-charge collections as its own management fees. The funds were held for the contractual purpose of meeting common-area expenses. The Tribunal described the collections as pass-through fiduciary funds and held that they did not constitute taxable income belonging beneficially to the management company.
Accounting Treatment Did Not Determine Taxability
A particularly significant aspect of the decision was the treatment of the taxpayer’s own tax returns. The taxpayer had previously presented the service-charge contributions as income in its returns and deducted the corresponding expenses. KRA relied on this treatment in supporting the assessments.
The Tribunal, however, held that an erroneous accounting presentation could not, by itself, transform funds held in a fiduciary capacity into taxable income. The Tribunal emphasised that tax liability is determined by the true nature and legal character of the transaction, rather than simply by the accounting entries used to record it. This is an important principle for taxpayers who collect money on behalf of clients, members, property owners or other third parties.
VAT Assessment Also Set Aside
The Tribunal also considered whether the service-charge collections represented consideration for taxable services supplied by the management company. The evidence showed that the actual services at the mall including management, security, cleaning, repairs, garbage collection and utilities were provided by third-party suppliers who invoiced for those services and accounted for VAT.
The Tribunal found that the amounts received by the management company represented reimbursement of the owners’ proportionate share of those costs rather than consideration for services supplied by the management company itself. Consequently, the Tribunal held that charging VAT on the gross contributions would effectively impose VAT on amounts relating to supplies for which VAT had already been accounted for by the actual suppliers. The Tribunal therefore found that the service charges and member contributions did not constitute consideration for a taxable supply by the management company.
The Decision Does Not Mean All Service Charges Are Tax-Free
Importantly, the decision should not be interpreted as establishing that all service charges collected by management companies are automatically outside the scope of Income Tax or VAT. The Tribunal’s decision was based on the particular contractual, financial and operational arrangements demonstrated by the evidence in this case.
The Tribunal expressly recognised that income earned by the taxpayer from its own activities, including the Kiosk and Maasai Market, constituted trading income chargeable to tax. The distinction is therefore between: Funds collected and held on behalf of others and Income earned by a taxpayer for its own account. That distinction can have significant tax consequences.
Importance of Proper Documentation
The decision demonstrates the importance of maintaining comprehensive documentation to establish the true character of receipts. Relevant records may include: Sale and purchase agreements; Management agreements; Service-charge agreements; General meeting resolutions; Third-party supplier invoices; Bank statements; Ledgers and reconciliations; Financial statements; and Evidence demonstrating how surpluses and deficits are treated.
In a tax dispute, the taxpayer bears the burden of demonstrating that an assessment is incorrect. The Tribunal found that Nextgen Mall Management Company Limited had discharged that burden through the documentary evidence presented.
Final Decision
The Tax Appeals Tribunal ultimately allowed the appeal. The Tribunal: Set aside the Respondent’s objection decision dated 2 December 2025; and Ordered each party to bear its own costs.
Key Tax Takeaway
The Nextgen Mall Management Company Limited decision reinforces an important tax principle:
Not every amount received by a taxpayer constitutes taxable income, and the movement of money through a taxpayer’s account must be considered together with the underlying contractual and commercial arrangements.
For property management companies and other businesses handling third-party funds, it is therefore important to ensure that the contractual arrangements, accounting records, tax returns and actual flow of funds are properly aligned.
A tax review conducted before an assessment or audit can help identify potential issues with the classification and treatment of receipts. Gichuri & Partners provides tax advisory, KRA tax audit support, tax assessment assistance, tax objections, Tax Appeals Tribunal representation and tax compliance services to businesses in Kenya.
We Handle Taxes, You Handle Business.
Disclaimer: This article is provided for general information and educational purposes only and does not constitute legal or tax advice. The application of the principles discussed will depend on the specific facts and circumstances of each taxpayer.
