The Kenya Revenue Authority (KRA) has removed 475 officials from approving applications for value added tax (VAT) refunds and flagged 4,434 traders linked to a fraudulent scheme that has cost the State at least Sh2.5 billion monthly.
The dropped officials represent 74 percent of the team that handled VAT claims registration applications at the KRA, which means that only 170 officials out of the initial 645 now handle the task as the taxman seeks to tighten the noose on tax cheats.
This follows an audit that revealed hundreds of firms created fake transactions that let fraudsters milk the system by seeking VAT on goods and services without any physical trade at all.
Other companies also charged VAT on goods and services and disappeared without remitting the 16 percent consumption tax to the KRA.
Workers at the tax collection agency have in the past been accused of colluding with tax evaders and taking bribes, cutting government revenue.
The taxman estimates that the fraudulent VAT scheme costs it at least Sh2.5 billion in revenue monthly or Sh30 billion annually because, with losses even higher through invoices filed for income tax.
“The authority to approve VAT obligation applications has been significantly restricted, reducing the number of staff with this role from 645 to 170. This measure is designed to improve oversight and reduce opportunities for fraudulent registrations,” says the KRA in an internal confidential report.
“At registration, we have reviewed and tightened the VAT guidelines relating to the addition of VAT obligations. This includes enhanced physical verification checks and more rigorous taxpayer due diligence to ensure legitimacy before registration,” it said.
The KRA, in response to Business Daily queries, confirmed the purge following an audit that revealed that VAT collection performance had been stifled by fraud through the notorious ‘Missing Trader Scheme’, which involves issuing fictitious invoices to depict a business transaction where no goods and services were supplied.
In the ‘Missing Trader Scheme’, firms simulate a genuine trading process using several registered business names by trying to meet all the legal requirements of a ‘supply’ for tax purposes.
The traders in the fraudulent scheme do not supply any goods or services, but “payment” is made to create a notional cost of goods sold, which in turn is used to claim VAT refunds.
The scheme aims to delink and hide the final economic beneficiary of the purchases to avoid tax obligations.
“A thorough review of VAT data has revealed that unscrupulous traders are registering new companies solely to perpetrate VAT fraud. This fraud typically involves multiple companies or individuals, known as ‘missing traders’, who vanish with the VAT owed, severely undermining our tax collection efforts,” KRA revealed in the internal report.
The KRA audit identified 4,434 suspected “missing traders” after a paper trail of purported business transactions revealed mischief.
The audit established that 2,080 traders sent invoices totalling Sh19.69 billion with VAT implications of Sh2.94 billion but have filed nil or no VAT returns since July 2024, while beneficiaries claimed purchases worth Sh13.64 billion, resulting in a potential VAT loss of Sh2.14 billion.
The review by the KRA also showed that 2,345 taxpayers filed VAT returns between January and March 2025, but did not remit VAT payments, with the outstanding amount from these taxpayers standing at Sh2.54 billion from July 2024 to March 2025.
“These suspected ‘missing traders’ have been placed in the special table in bulk to disrupt their fraudulent activities by limiting the opportunity to be claimed by the beneficiaries,” the KRA said in its confidential report.
The audit further revealed a suspected VAT evasion scheme among sugar importers and suppliers of Kenya Power, with some of the traders even sending threats to KRA officers to ‘keep off’.
“KRA has also identified specific taxpayers supplying KPLC and importing sugar, while they declare the relevant VAT to be paid to KRA – they have failed to pay the taxes despite demands being levied against them,” the taxman said.
“One specific group of companies has an outstanding tax of Sh1.1 billion unpaid to date. Efforts to collect the amount have elicited threats and innuendos, clearly demonstrative of the lack of commitment to comply with the law.”
The audit discovered that out of approximately 90,127 existing VAT obligation cases listed under a special category known as ‘special table’, some 20,981 were inactive taxpayers, raising suspicion of tax evasion schemes through fictitious transactions.
“These (inactive taxpayers) have been targeted for bulk deregistration to clean up the register and reduce opportunities for fraud. The remaining taxpayers under the special table are undergoing further review to determine eligibility for dormancy or suspension status, thereby limiting their ability to engage in fraudulent activities,” KRA said.
A taxpayer added in the ‘VAT Special Table’ is restricted from filing VAT returns. If one attempts to file a return, the system shall display the message: “This PIN is currently under review for VAT compliance irregularities”.
The ‘Special Table’ was introduced in the VAT returns system and designed to block claims from nil and non-filers for VAT, as well as from a list of suspected missing traders based on previous audits and intelligence received.
A taxpayer listed on the ‘Special Table’ can only be removed by a Tax Service Office of the KRA.
The ‘Special Table’ mainly contains ‘missing traders’, non-filers or taxpayers who have not filed returns for six months and nil filers or taxpayers who have filed nil returns for six months or more but have input tax claims made against them.
It also includes VAT-registered taxpayers who have not complied with the electronic tax invoice regulations, and taxpayers who have filed returns and not made payments for six months and all efforts have been made to collect the debt but cannot be traced.
VAT collections fell by 4.3 percent in the six months to December 2024, data shows, the first such drop since the Covid-19 pandemic. The combined collections from both local and import VAT fell to Sh304.1 billion in the period from Sh317.8 billion at the same time in 2023, according to Treasury data.
In January 2025, the KRA collected a record Sh34.552 billion in VAT, surpassing previous monthly records—a feat linked to the implementation of VAT auto-population of returns, which streamlined the filing process and boosted compliance.
The Treasury targets netting Sh177 billion in the new financial year by sealing revenue leaks.
