How 2026 tax changes will affect businesses

Big companies and small ones like freelancers, landlords, mechanics, teachers offering tuition, mama mbogas, carpenters, clinics, churches, NGOs, transport operators, barbershops and salons, will all be expected to operate within a digital tax system.

If you spend money without an electronic invoice, KRA assumes you did not spend it. For example, a carpenter who buys timber for Sh100,000 with no eTIMS receipt will have that entire amount added back to his taxable income.

A business paying Sh360,000 annual office rent without an eTIMS rent invoice will find the whole expense disallowed. A shopkeeper paying Sh260,000 for cleaning services in cash, with no digital receipt, will be taxed on the full amount as if it were profit.

The taxman will rely on automated matching across multiple databases like eTIMS/TIMS records from suppliers, customs and import data, and withholding tax submissions.

If your tax return shows lower figures than what the systems (regardless of their integrity) reflect, the KRA will use the higher figure. This introduces a level of scrutiny that is swift, data-driven, and unforgiving of gaps in documentation.

A disruptive aspect for ordinary Kenyans is the death of informal suppliers, where many small and medium enterprises (SMEs) rely on Jua Kali networks because they are cheaper, faster, and more flexible than formal suppliers.

However, from 2026, “cheap” becomes very expensive. Any expense not backed by a compliant eTIMS invoice becomes useless for tax deduction, which means your taxable profit shoots up.

Many businesses may be forced to abandon long-time suppliers and shift to formal channels, a transition that carries cost implications.
Another eye-opener is that this rule applies even to non non-value-added tax (VAT) businesses.

For example, a tutor giving private lessons, a landlord collecting rent, a photographer covering events, a hairdresser running a home salon, or a barber offering house calls must all issue electronic invoices to clients who need to claim those expenses.

The days of handwritten receipts, carbon-copy booklets, and mobile money confirmations being “enough” are effectively over.

The directive forces digital records, formal reporting, and transparent invoicing, which benefits long-term economic planning but hurts informal traders who have operated outside structured taxation. This is why it’s controversial: it seems fair on paper but hard on the ground.

The KRA will deploy the VAT Special Table to enforce this regime, and this includes deactivating eTIMS/TIMS devices at will, withdrawal of tax compliance, deactivation of VAT obligation, and even freezing of both suppliers and bank accounts.

This is happening despite pending constitutional cases in courts. The Special Table allows KRA to temporarily or indefinitely disable a taxpayer’s ability to issue invoices, effectively halting their business operations without prior hearing. In a digital tax environment where no invoice means no business, this power is unparalleled.

The changes from January are not merely tax adjustments but a structural transformation of Kenya’s economic landscape.

Those who adapt early will survive the transition. Those who ignore it may face penalties, disallowing of inputs, audits, compliance checks, investigations, rejected expenses, financial strain, or even operational shutdowns. To KRA, tax compliance supersedes economic growth, expansion of the tax base, or taxpayers’ facilitation.

To the micro-economy, winter is coming—and the implications will be felt across every corner of the Kenyan economy. Get ready.

Opiyo Nyakwar’ Nyangor’ and Henry Katambo,Certified public accountants and tax lawyers
[email protected]