Major VAT changes for businesses in South Africa

South Africa’s planned increase in the VAT registration threshold to R2.3 million is forcing small businesses to rework their tax strategies or risk undermining their long-term growth and financial stability.

For the first time in 30 years, South Africa’s VAT compulsory registration threshold is set to shift to R2.3 million. For thousands of small- and medium-sized enterprises (SMEs), this means they will need to make a high-stakes decision this financial year-end.

While the R1.3 million increase offers immediate compliance relief, treating the reform as a simple cost-saving exercise could jeopardise the long-term cash flow and corporate credibility of growing businesses.

This legislative pivot arrives as South African SMEs already grapple with persistent cost pressures, longer payment cycles, and a shifting tax landscape.

These factors are intersecting just as founders are expected to finalise accounts, prepare for SARS submissions, and plan for growth.

While welcomed by many small businesses, this shift is exposing a deeper challenge in the SME ecosystem – the cost of running a business without real-time financial clarity.

The Xero South African State of Small Business report data shows that late payments remain one of the biggest risks to business survival.

Small firms consistently wait well beyond agreed terms to collect what they are owed. At the same time, adoption of cloud accounting tools is accelerating among resilient SMEs.

This is particularly true for those seeking greater visibility into cash flow, tax exposure, and runway in an uncertain economic climate.

“Year-end is no longer just an accounting exercise, it’s an emotional and strategic moment for founders,” said Xero EMEA regional director Colin Timmis.

“When you don’t know your true burn rate, how much VAT is sitting in your bank account, or whether you can meet payroll three months from now, that uncertainty becomes a hidden tax on entrepreneurs.”

The overlooked risks threatening SME growth

Inflation, interest rates, and load-curtailed productivity often dominate headlines. However, practitioners working directly with SMEs point to a more basic, and expensive, failure – not collecting money already earned.

“The biggest cash flow mistake I see at year-end is not collecting accounts receivable in time,” said Moepathutsi Consulting founder and managing director, Mogale TP Maepa.

“Most SMEs are reactive because they rely on manual processes. There are no automated reminders, no up-to-date debtor ageing, and no easy way for customers to pay quickly.”

Maepa added that, for many SMEs, this means that cash that should be funding growth is still locked up in outstanding invoices by year-end.

Xero data revealed that in 2025, SMEs using online invoices with embedded payment links and automated reminders consistently collected faster than those relying on emailed PDFs and manual follow-ups.

For business-to-consumer (B2C) businesses managing high volumes of smaller invoices, these tools are no longer nice-to-haves.

“Every extra step you put between your customer and payment increases the chance of distraction,” Maepa explained.

“A payment link allows someone to settle an invoice immediately, before life gets in the way. That single click can materially improve collections.”

From April 2026, SMEs will only be required to register for VAT once turnover exceeds R2.3 million, presenting an immediate opportunity for businesses.

However, he warned that short-term decisions driven purely by price competitiveness or compliance fatigue could pose risks. “VAT is not just a tax issue, it’s a commercial signal,” he said.

“B2C SMEs below the threshold may benefit from deregistering, gaining an instant 15% pricing advantage and reducing compliance costs.”

It is especially important that businesses servicing VAT-registered corporates should think very carefully before stepping away. Maepa said one of the most common mistakes is taking a short-term view on VAT registration.

“If you’re on a growth trajectory and likely to cross the R2.3 million threshold again within months, deregistering only to re-register creates administrative friction and unnecessary disruption,” he said.

Beyond VAT, SARS scrutiny at year-end is intensifying, particularly where VAT, PAYE and fixed assets are concerned.

Being “audit-ready” is no longer about scrambling for documents when a query arrives. “Today, audit-ready means every transaction is digitally supported and reconciled in real time,” Maepa explained.

“Invoices, receipts and bank transactions should be linked automatically, with reconciliations for VAT, payroll tax and fixed assets always up to date. Automation tools remove human error and significantly reduce audit risk.”