The Finance Act 2026 introduces important compliance changes for NGOs, donor-funded programmes and public-sector entities. The biggest risks are not necessarily higher tax rates, but documentation gaps, historical tax exposure, revised deadlines and stronger enforcement powers.

KEY TAKEAWAYS

The Finance Act 2026 creates four immediate priorities for organisations:

01 — Tax Amnesty
Qualifying historical principal tax must be settled by 31 December 2026.

02 — Import Documentation
New export documentation requirements begin on 1 September 2026.

03 — Software Payments
Organisations should review withholding tax treatment of payments to non-resident software vendors.

04 — Grant Compliance
Tax penalties and interest may become costs that cannot be charged to donor-funded programmes.

The Finance Act, 2026 (Act No. 19 of 2026) came into force on 1 July 2026. It does not raise headline tax rates. What it does instead is tighten the machinery of compliance, and for organisations whose expenditure is examined by external funders, that machinery is where the financial risk now sits.

The changes that matter most to the not-for-profit sector are not those that attracted the widest public attention. They concern documentation, recovery powers, filing deadlines and the evidential burden now resting on the taxpayer. Together they mean that an administrative oversight which might once have been corrected quietly can produce a penalty, and in a grant-funded organisation a penalty is rarely a simple cash cost.

A six-month window to clear historical exposure

The Act amends section 37E of the Tax Procedures Act to move the amnesty cut-off from 31 December 2023 to 31 December 2025. An organisation that fully settles qualifying principal tax accrued up to that date will receive a complete waiver of the penalties, interest and fines attached to it, provided the principal is cleared by 31 December 2026.

How the relief operates depends on an organisation’s position. Those that had already settled all principal tax by 31 December 2025 qualify automatically and need make no application. Where the only exposure is a late-filing penalty, filing the missing returns is sufficient to clear it. Where principal tax remains unpaid, it must be settled in full within the window; payment plans are available through iTax, but the entire principal must still be cleared by 31 December 2026 for the waiver to hold.

There are firm limits. Liabilities arising on or after 1 January 2026 fall outside the amnesty entirely and remain payable with penalties and interest. Tax avoidance penalties charged under section 85 of the Tax Procedures Act are excluded from the waiver. Matters already before the courts are directed instead to the Alternative Dispute Resolution process. Most importantly, the relief is granted once only to a qualifying taxpayer. There will be no second opportunity.

Two practical points deserve emphasis. Six months is shorter than it appears as certain key processes such as reconciliation, a payment plan application and Board or donor approval need to be completed. And because expenditure unsupported by valid eTIMS invoices may be disallowed, the principal required to unlock the waiver can be considerably larger than the figure currently recorded in the ledger. The reconciliation should therefore come first.

New documentation requirements for imported goods

From 1 September 2026, a new section 23B of the Tax Procedures Act requires every importer to obtain and retain, for a period of five years, an export declaration or equivalent customs document issued in the country of export and containing prescribed particulars. Where an importer cannot produce that document, the Kenya Revenue Authority may reject the declared value, origin, cost or ownership of the goods, redetermine the customs value and the tax due, and impose administrative penalties.

This requirement falls awkwardly on donor-funded programmes. Programme goods such as medical commodities, vehicles, laboratory equipment, school materials and relief supplies are commonly imported through freight forwarders, procured under international framework agreements, or received as in-kind contributions from a funder. In each of those arrangements the export-side documentation rests with a third party, frequently in another jurisdiction, and obtaining a compliant declaration after the fact is difficult and sometimes impossible.

Procurement and logistics teams should therefore engage suppliers, freight forwarders and donor procurement agents now, so that the documentation is captured at the point of shipment and filed against the correct project code rather than sought retrospectively during an audit.

Staffing arrangements and payments to software vendors

The Act amends section 13 of the Value Added Tax Act so that where a supplier of labour, outsourcing or employee-placement services incurs employee-related costs such as salaries, wages and statutory deductions, those costs are treated as non-taxable disbursements made on behalf of the client. Many organisations engage programme staff through employer-of-record arrangements, staffing agencies or secondments, particularly where a country office is not yet registered or a funder’s rules restrict direct hiring. Existing contracts and invoicing templates should be reviewed against the amended provision.

The Act also confirms a broadened definition of royalty under which software licence, development, maintenance and support fees are subject to withholding tax, and introduces withholding tax on interchange fees. Grant-funded organisations routinely pay non-resident vendors for financial management systems, case management platforms and data collection tools, together with the annual maintenance attaching to them. Where withholding tax has not historically been applied to those payments, the exposure should be quantified, and it may well fall within the amnesty window described above.

Wider recovery powers, revised deadlines and adjusted penalties

A new section 39B of the Tax Procedures Act permits the Kenya Revenue Authority, where it collects a fee, levy or charge under any other written law, to recover unpaid amounts as though they were unpaid tax, with amounts up to KES 100,000 recoverable summarily. This extends the Authority’s enforcement reach well beyond tax liabilities into the range of statutory charges it administers.

Elsewhere, the penalty for failing to use electronic tax systems is set at five per cent of the tax due, subject to a minimum of KES 100,000 for a company and KES 10,000 for an individual. The exemption for employer gratuity contributions is retained but capped at thirty-one per cent of the employee’s emoluments earned over the contract period and applies to contracts of service of at least three years. From 1 January 2027, individuals must file income tax returns within four months of the year end, while companies retain the six-month deadline.

Why this is a grant compliance matter, not only a tax one

Under most institutional grant agreements, tax penalties and interest are ineligible costs and cannot be charged to the grant. Where an implementing entity incurs a penalty, that cost is ordinarily absorbed from unrestricted reserves, or else it surfaces as a finding in the project audit and, in the worst case, becomes a refund obligation to the funder.

Read against that background, the Finance Act, 2026 is not principally a tax story. Each of the provisions described above converts a documentation failure into a cash cost that no donor will reimburse. The window closing on 31 December 2026 is an opportunity to resolve historical exposure before it hardens into an audit finding, and it will not be offered again.

Key dates

What should organisations do now?

1. Quantify historical exposure across PAYE, withholding tax and value added tax for periods up to 31 December 2025, and assess eligibility for the amnesty.
2. Reconcile eTIMS-supported expenditure before agreeing to any payment plan, since disallowed expenses will increase the principal that must be settled.
3. Brief procurement and logistics teams on the export declaration requirement ahead of 1 September 2026 and build document capture into shipping instructions and supplier contracts.
4. Review labour supply, secondment and employer-of-record contracts against the amended VAT treatment of recharged employee costs.
5. Test the withholding tax treatment of payments made to non-resident software and platform vendors.
6. Confirm the status of your tax exemption certificate, its renewal date, and the alignment of your actual activities with your stated charitable objects.
7. Report the position to your Board, Audit Committee and funders before the December window closes, rather than afterwards.

How we can help

M.N. Cliff & Associates LLP provides tax, audit and advisory services to non-governmental organisations, donor-funded programmes, public-sector and private sector entities.  

We are currently supporting clients with amnesty eligibility assessments, quantification of historical exposure and readiness reviews ahead of the September and December 2026 deadlines. To discuss how the Finance Act 2026 affects your organisation, please contact us.