Warning about VAT changes for businesses in South Africa
The VAT registration threshold limit has increased in South Africa, but SME funder Lula has warned small businesses that deregistering from VAT could lead to an unexpected tax event.
Finance Minister Enoch Godongwana recently announced the VAT registration threshold would be increased from R1 million to R2.3 million. The change came into effect on 1 April 2026.
The change came during the 2026 National Budget, as part of “Tips for the Budget,” where members of the public submit their opinions and suggestions.
A small business owner from Gauteng called on the Minister to increase the threshold, as it has not kept pace with the cost of doing business and has not been updated in 17 years.
While the change will ease compliance burdens for SMEs and offer greater flexibility, businesses have been warned that the decision to deregister is far from simple.
Although many business owners may think it is easy to opt out, Lula has cautioned that they need to consider both financial and operational implications.
“The threshold increase is a positive move in reducing administrative pressure on SMEs,” said Shaheeda Solomon, Finance Manager at Lula.
“But deregistering for VAT is not just an administrative step; it’s a tax event, and that can trigger immediate tax liabilities that businesses may not have planned for.”
There are clear benefits for businesses that now fall below the threshold, including no longer needing to submit VAT returns and pricing advantages, especially for those that sell directly to consumers.
“If you’re selling directly to individuals, removing VAT from your pricing can make your offering more competitive, or improve your margins,” Solomon said.
“But that benefit needs to be weighed carefully against what you lose.”
The hidden impact of the increase
One major trade-off is the inability to claim input VAT on business expenses. Once deregistered, any VAT paid on purchases then becomes a cost to the businesses.
“Expenses that were previously recoverable suddenly become more expensive, which can erode the margin gained from deregistering.”
The impact of this can differ significantly depending on the business model, as businesses with low overheads and a consumer-facing customer base may see minimal downside upon deregistration.
For businesses with high input costs or that primarily serve other VAT-registered companies, the consequences can be more severe.
“If your customers are VAT-registered businesses, they generally expect you to be VAT-registered too, so they can claim VAT on your invoices,” Solomon said.
“If you’re not, your pricing becomes effectively more expensive to them.”
Cash flow is also another important consideration, as deregistered businesses can benefit from more predictable cash flow, as all incoming revenue belongs directly to the business without VAT obligations.
A longer-term view is also important. Lula said that businesses below the new R2.3 million threshold should prepare to re-enter the VAT system if required.
“Once you exceed the threshold, you have 21 business days to register as a VAT vendor, and SARS is strict on enforcement,” Solomon explained.
“We typically advise businesses with a turnover of around R1.8 million to start preparing by cleaning up their bookkeeping and putting systems in place to manage VAT compliance.”
She added SMEs need to avoid viewing VAT registration as a simple tick-box exercise and instead treat it as a strategic business decision.
The decision depends on one’s customers, their cost structure and growth trajectory, with no one-size-fits-all answer for businesses.
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