Executive summary

The Tax Appeals Tribunal (Tribunal) held in Howard Humphreys (East Africa) Limited v Commissioner of Domestic Taxes, Tax Appeal No. E980 of 2025 (10 July 2026), that an ascertained and approved tax overpayment could be offset against a taxpayer's pay-as-you-earn (PAYE) remittance liabilities under section 47(1)(a) of the Tax Procedures Act, 2015 (TPA).

The Tribunal found that section 47(1)(a) does not restrict offsets to specified tax obligations. It also held that an administrative circular cannot amend or limit a statutory entitlement without legislative authority. The Tribunal consequently set aside the Kenya Revenue Authority's (KRA) decision denying the offset and vacated interest of 151,642 Kenyan shillings (KES) that had accrued on the affected PAYE liabilities.

Background

Howard Humphreys (East Africa) Limited's (the Appellant) professional fees were subject to withholding tax (WHT) at 5% under section 35(3)(f) of the Income Tax Act. Due to substantial accumulated tax losses, the Appellant could not utilize the WHT credits against its corporation tax, and the credits accumulated as overpaid tax.

On 30 March 2023, the Appellant claimed an income tax refund of KES 47,910,316 for 2017, 2020 and 2021. Following a refund audit, the Commissioner of Domestic Taxes (Respondent) confirmed by letter dated 27 March 2024 a refundable amount of KES 42,210,316 (after an additional WHT assessment of KES 5.7m for 2020).

The Respondent declined to issue a cash refund and instead directed the Appellant, via a 21 July 2025 email, to apply for an offset. The Appellant obtained two Overpayment Adjustment Vouchers (OAVs) under section 47(1)(a) of the TPA: KES 31,163,043 (2020/2021) and KES 16,747,273 (2017). Between July 2024 and June 2025, the Appellant used the OAVs via iTax to offset PAYE (KES 39,380,133) and VAT (KES 3,801,580) liabilities, totaling KES 43,181,713.

On 19 June 2025, the Cabinet Secretary, National Treasury, issued a circular directing that approved refunds should not be offset against PAYE or other agency taxes, but only against the taxpayer's own corporation tax, value-added tax (VAT) and excise duty. Following publication of this circular, iTax's PAYE-offset functionality was disabled. On 9 August 2025, the Appellant was unable to offset its July and August 2025 PAYE liabilities, with interest accruing on both. The Respondent did not respond to the Appellant's 13 August 2025 request to reactivate the offset functionality.

The Appellant challenged the KRA's decision on the following grounds:

• The KRA's decision unlawfully infringed the Appellant's right to fair administrative action and procedural fairness under Article 47 of the Constitution.
• The KRA denied the Appellant the statutory right to offset overpaid tax against PAYE and future tax liabilities.
• The KRA unlawfully imposed interest of KES 151,642.30, contrary to section 47(7) of the TPA.

Appellant's position

The Appellant submitted that section 47(1)(a) of the TPA confers an unqualified right to offset overpaid tax under any tax law against a taxpayer's outstanding tax debts and future tax liabilities, with no restriction by tax obligation. It argued that PAYE and VAT are both agency taxes for which the legal obligation to account falls on the employer/supplier, so if VAT offsets are permitted, PAYE offsets must equally be permitted. The Appellant contended that a Treasury circular, as a subordinate administrative instrument, cannot override or restrict a statutory entitlement (Article 94(5) of the Constitution), and that the Respondent's prior acceptance of PAYE offsets created a legitimate expectation that could not be unilaterally withdrawn without a change in law. It further argued that the interest charged was contrary to section 47(7) of the TPA, and that its ascertained tax credit was property protected under Article 40 of the Constitution.

Respondent's position

The Respondent maintained it did not deny offsets generally because the Appellant had used OAVs against VAT. This dispute was confined to whether PAYE, which the KRA regarded as the employee's tax for which the employer acts as a collection agent, could be offset using the employer's own tax credit. The Respondent asserted that the right to claim any refund or offset of PAYE belonged to the employee (the true taxpayer under section 3 of the TPA), and that allowing the employer to use its credit against PAYE would unjustly enrich the Appellant and cause revenue loss contrary to Article 210(1) of the Constitution. The Respondent submitted that the Treasury circular was simply guidance consistent with Section 47, and that legitimate expectation cannot override clear law.

Issues for determination

At issue before the Tribunal was:

• Whether the Tribunal had jurisdiction to determine alleged violations of Articles 40(3) and 47 of the Constitution
• Whether the Appellant was entitled under section 47(1)(a) of the TPA to offset its ascertained overpaid tax against PAYE, and whether reliance on the Treasury circular to deny this was lawful
• Whether the interest of KES 151,642.30 should be vacated

Analysis and determination

On the issue of jurisdiction, the Tribunal noted that jurisdiction is a creature of statute under the Tax Appeals Tribunal Act, 2013. It held that questions concerning alleged violations of the Bill of Rights, including Articles 40(3) and 47 of the Constitution, fall within the jurisdiction of the High Court of Kenya. The Tribunal therefore declined to determine those claims. However, the Tribunal found it could dispose of the appeal through the interpretation of section 47 of the TPA, without determining the constitutional and legitimate expectation arguments.

Regarding the entitlement to offset PAYE, the Tribunal held that, although PAYE represents tax charged on employment income, the obligation to deduct, account for and remit the tax is imposed on the employer. Accordingly, the employer's PAYE remittance obligation constitutes a tax debt or liability capable of settlement through an approved offset under section 47(1)(a).

The Tribunal distinguished unjust-enrichment authorities that the Respondent cited as concerning agents claiming refunds belonging to a principal. This was not the Appellant's situation, because the Appellant sought only to use its own ascertained credit to settle its own remittance obligation, leaving employees' PAYE credit unaffected. The Tribunal also rejected the argument that the offset caused unlawful revenue loss under Article 210(1), because an offset merely reduces mutual debts without extinguishing tax due.

The Tribunal held that the National Treasury circular, being a subordinate administrative instrument, cannot amend or restrict a statutory provision absent legislative authority (Article 94(5) of the Constitution). Further, the Tribunal noted that the circular itself acknowledged that a legislative amendment to section 47 had been proposed but not yet enacted. The Tribunal buttressed its conclusion by looking to the Respondent's prior conduct in accepting PAYE offsets via iTax for nearly a year without objection. The Tribunal consequently found that the KRA's decision to deny the offset was not anchored in law and ordered that the resulting interest be vacated.

Implications

The Tribunal's decision is particularly relevant for taxpayers holding approved credits that cannot readily be absorbed against corporation tax. Such taxpayers may consider applying to offset those credits against PAYE and other tax liabilities under section 47(1)(a) of the TPA. Taxpayers should maintain any refund confirmations, OAVs, correspondence with the KRA and evidence of unsuccessful offset attempts. In addition, interest arising from an unlawful refusal to permit an otherwise-valid offset may be challenged, depending on the specific facts.

This case demonstrates that administrative circulars and system restrictions might not limit statutory entitlements, unless supported by the governing legislation.

As the decision may be subject to appeal, taxpayers should assess the nature and status of their credits and the applicable administrative procedures before seeking an offset.