How KRA’s 2026 expense rules will change the way businesses operate

Starting 1st January 2026, the Kenya Revenue Authority (KRA) will begin validating all income and expenses declared in tax returns against official data sources.

While accountants have been aware of this change, most Kenyans and small business owners are only now coming to grips with the implications.

This new system is set to transform how businesses document spending, and failure to comply could mean paying tax on money already spent, an outcome that may hit many SMEs hard.

How the new validation works

KRA will cross-check all declared income and expenses against three primary sources:

1. TIMS/eTIMS invoices – electronic tax invoices for goods and services.

2. Withholding tax records – gross amounts already deducted at source.

3. Import records – information from customs systems.

If a declared expense does not have a valid eTIMS invoice, KRA will treat that expense as profit in its system. In other words, every shilling spent without an e-invoice will be added back to your taxable income, inflating profits and increasing tax liability.

“All declared income and expenses must be supported by a valid electronic tax invoice, correctly transmitted with the buyer’s PIN, where applicable,” the KRA notice states.

Why this is a problem in Kenya

Many everyday suppliers in Kenya operate informally and cannot issue eTIMS invoices. These include:

• Small traders and jua kali artisans

• Farmers and rural producers

• Transporters without PINs

• Service providers such as electricians, plumbers, and carpenters

Businesses that rely on these suppliers will face a dilemma: unless the expense is documented electronically, KRA will assume the money remains in the business’s pocket.

An example: The farm inputs business

Think of a small agribusiness that buys fertiliser and seeds from a rural supplier who has no PIN and cannot issue an eTIMS invoice.

If the business paid Sh400,000 for these inputs, KRA will automatically treat that Sh400,000 as profit, even though it was spent on genuine business expenses.

Now imagine a business spent Sh1million in total, but only Sh300,000 has eTIMS documentation. The remaining Sh700,000 will inflate profits, increasing the company’s tax bill and squeezing cashflow.

Broader effects on businesses

• Artificially higher profits: Undocumented expenses are treated as income.

• Increased tax bills: Businesses may pay more tax than they should.

• Reduced cashflow: Paying tax on money already spent limits working capital.

• Higher compliance costs: Businesses will need better invoicing, record keeping, and possibly accounting services.

• Supply chain pressure: Companies may pressure informal suppliers to formalise or switch to pricier formal suppliers.

• More disputes: Mismatched records will trigger audits, complaints, and delays.

This change will hit small businesses and the informal economy hardest, with some enterprises potentially unable to survive the new system.

Risk of struggles and shutdowns

The impact will be particularly harsh on small and informal businesses. Those that cannot issue eTIMS invoices, or that rely on rural or informal suppliers, will face inflated tax bills, reduced liquidity, and increased administrative burdens.

• Many micro and small enterprises may struggle to pay taxes on money already spent.

• Informal suppliers could lose clients as formal businesses move to compliant vendors.

• Some small businesses may shut down entirely if cashflow pressures become unsustainable, while others will have to restructure operations to survive.

How businesses can prepare

1. Map suppliers and flag informal ones: Identify who can and cannot issue eTIMS invoices.

2. Insist on e-invoices: Where possible, ensure suppliers issue valid eTIMS invoices with the buyer’s PIN.

3. Formalise key suppliers: Support high-value or recurring suppliers to register for PINs and electronic invoicing.

4. Improve bookkeeping: Keep digital records of all transactions, including bank transfers, delivery notes, and contracts. Bank evidence alone will not suffice.

5. Check withholding tax records: Ensure that all deducted taxes are documented and filed correctly.

6. Document exemptions: If an expense cannot have an e-invoice, record why it qualifies for Section 23A exemption and keep evidence ready for verification.