There is an old saying that hard cases make bad law. In Kenya, an equally compelling observation is emerging: sometimes Parliament makes new law because the courts got the old law exactly right. That is precisely what has happened with the Finance Act, 2026.
After years of litigation over the VAT treatment of labour outsourcing, the High Court had finally delivered what appeared to be a definitive answer. Outsourcing companies were required to account for VAT on the full value of their invoices—including payroll costs—not merely on their management fees. The court was not making policy; it was interpreting the law as Parliament had written it.
Then Parliament intervened. Effective July 1, 2026, employee-related costs incurred by outsourcing firms are now deemed to be disbursements made on behalf of clients, removing them from the VAT base. In practical terms, VAT will now apply only to the outsourcing firm’s service fee. For the outsourcing industry, this is an unequivocal victory. For businesses that rely on outsourced labour, it promises lower costs and improved cash flow.
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