Imagine signing off on what you believe is a standard consultancy agreement- only to receive a tax demand from KRA over 20 million shillings. That is not a hypothetical case. It happened before.
Introduction: Could a Simple Contract Cost You Millions?
In Kenya’s evolving tax landscape, the difference between a consultant and a full-time employee isn’t just academic—it can be the difference between a compliant business and a costly legal battle. As businesses embrace lean models, outsourcing, and project-based hires, the line between these two classifications is becoming dangerously blurred.
Therefore, are you sure your “consultant” isn’t actually an “employee”? Because if you are wrong, the Kenya Revenue Authority (KRA) might come knocking—with penalties, back taxes, and interest in hand. We have seen first-hand and handled cases where KRA has aggressively challenged, re-assessed, and re-characterised engagements previously labeled as independent consultancy into employee-employer relationships. The financial and reputational consequences of such findings are rarely insignificant and nowhere was this better illustrated than in the 2025 case of Qhala Limited vs Commissioner of Domestic Taxes.
In that case, KRA took the position that 43 professionals engaged as consultants were, in fact, employees—liable to PAYE rather than withholding tax. The resulting tax demand? Over KES. 20 million. This case is not an outlier. It is a mirror. If your business engages consultants or contractors, you need to know what happened—and what it means for you.
The Digest
Employee or Consultant? What the Law Actually Looks At
Insights from the Qhala Ruling
Courts have applied these legal indicators that remain central to distinguishing employment from consultancy under Kenyan tax law:
✅ Control – Independent schedules, tools, and methods indicated minimal oversight.
✅ Integration – Consultants worked outside the internal structure of the business.
✅ Mutual Obligation – No ongoing work guarantees or standing payments.
✅ Economic Reality – Contractors bore their own risk and tools, even insuring themselves.
✅ Specificity of Engagement – Clear, time-bound deliverables, not open-ended roles.
✅ Payment Structure – Invoiced payments, not payroll cycles.
B. Why KRA Thought Otherwise?
KRA’s position offers critical insight into how even well-intentioned consultancy arrangements can raise red flags. It identified several features that, to the Authority, resembled employment:
- Regular invoicing patterns that mimicked payroll;
- Expense reimbursements typically associated with employment;
- Clauses on confidentiality, exclusivity, and IP ownership, often found in staff contracts;
- The consultants’ integration into business operations, which blurred the line between external and internal roles.
However, the Tribunal found these elements insufficient to override the full context of the relationship.
The takeaway? These features, though common in modern contracts, don’t automatically transform a consultant into an employee. But they do invite scrutiny, and businesses should be prepared to demonstrate that, despite these terms, the consultant remains operationally independent.
C. What This Case Means for Your Contracts—and Your Risk Profile
The case should not just inform your contracts—it should transform how you think about risk and structure in your workforce. So, what should you do?
- Conduct an internal audit of all consultancy contracts—especially those that resemble full-time roles in duration, control, or reporting.
- Align documentation with reality—if a consultant works like an employee, no disclaimer clause will save you.
- Avoid payroll-like invoicing structures—tie payments to outputs, not calendar cycles.
- Seek proactive legal advice—before engagement, not after audit.
D. Applicable Taxes and Deductions
The classification of a worker doesn’t just affect workplace dynamics—it determines the tax obligations your business faces.
If the individual is an employee:
- Income is subject to Pay-As-You-Earn (PAYE) and must be deducted by the employer at source and remitted monthly.
- Additional obligations include statutory deductions (e.g., SHIF, NSSF, Housing Levy and Pension where applicable).
If the individual is a consultant (independent contractor):
- Payments attract withholding tax at 5%. This is not a final tax—it’s a credit toward the consultant’s annual income tax return, filed under self-assessment.
- If the consultant earns a gross amount of over KES 5 million annually, they must register for VAT, charge 16% on taxable supplies, and submit monthly VAT returns.
The risk? If your classification is wrong, you could find yourself liable not only for underpaid PAYE, but for interest, penalties, and in some cases, VAT non-compliance.
Conclusion
Tax compliance is not just about filing—it’s about framing working relationships correctly from day one. Consultancy contracts are not shields. KRA will lift the veil on any label that conceals a payroll. And as the boundaries between employment and consultancy continue to blur, the burden is on businesses to ensure that every personnel they engage, is correctly classified, transparently documented, and lawfully taxed.
Authors:
Waithira Mugo – Tax Lawyer
Mike Ogutu – Commercial Lawyer
Contact us : info@wmcoadvocates.co.ke Disclaimer –This Article is in general terms for guidance only and is not intended to substitute professional advice. While due diligence has been undertaken, in ensuring the accuracy of information provided herein, Waithira M. & Co. Advocates is not responsible for any actions , omissions undertaken as a result of the same.
