Nasty VAT surprise waiting for businesses in South Africa

Although the VAT registration threshold has increased to R2.3 million, businesses that deregister could still be hit with an unexpected VAT bill from SARS.

In the Budget Speech, Finance Minister Enoch Godongwana announced that, starting on 1 April 2026, South Africa’s VAT registration threshold will increase from R1 million to R2.3 million.

Tax Consulting SA’s Team Lead of Tax Legal, Micaela Paschini, and Tax Attorney, Megan Langton, explained that many smaller businesses have welcomed the increase.

For vendors whose turnover now falls below the new threshold, the question naturally arises that, if VAT registration is no longer compulsory, should they remain in the system?

“At first glance, deregistering may seem like the logical next step. However, what appears to be a simple compliance decision can quickly become a costly tax event.”

“Hidden within the VAT Act is a provision that can trigger a once-off VAT liability at the very moment a business exits the VAT system.”

Unfortunately, Paschini and Langton said many vendors only become aware of this rule after they have already taken steps to deregister.

Deregistering for VAT is not as simple as businesses may believe. Doing so also does not merely end the obligation to submit VAT returns.

When a vendor ceases to be registered for VAT, section 8(2) of the Value-Added Tax Act (VAT Act) deems certain goods and rights forming part of the assets of the enterprise to have been supplied immediately before deregistration.

In practical terms, this means the vendor may be required to account for output VAT at the standard rate of 15% on the value of those assets, even though no actual sale has occurred and no cash has been received.

“Where input VAT was previously claimed on these assets, the VAT system effectively recovers that input tax through the deemed supply mechanism at the point of deregistration.”

“For many businesses, this is the stage where what appeared to be a straightforward administrative decision unexpectedly results in a VAT liability becoming payable to the South African Revenue Service (SARS).”

Businesses caught off guard

Paschini and Langton explained that, over time, most businesses accumulate goods and rights that form part of the enterprise’s assets on which they claim input VAT. These may include:

• Trading stock
• Machinery and equipment
• Intellectual property or contractual rights
• Other operational assets used in the business

“When a vendor deregisters while these assets remain in the enterprise, the deemed supply rule in section 8(2) may apply to their value.”

“Because many of these assets were not acquired for immediate resale, vendors may not anticipate that they may effectively be treated as taxable supplies at the point of deregistration.”

The result is that a business may only discover the VAT implications when calculating the final VAT position upon exit from the VAT system.

Paschini and Langton warned that, for businesses with significant historical input VAT claims, the amount involved can be substantial.

“The increase in the compulsory VAT registration threshold announced in the 2026 National Budget was introduced to reduce the compliance burden for smaller enterprises.”

“However, the change in the threshold does not override the operation of the deeming provisions contained in the VAT Act.”

In other words, they said, while a business may now qualify to deregister because its turnover falls below the new threshold of R2.3 million, the VAT consequences of deregistration remain unchanged.

“At the same time, SARS continues to strengthen its data-driven compliance capabilities. Vendor registrations, deregistrations and filing histories are increasingly visible to the revenue authority.”

“What may appear to a vendor as a simple administrative step could prompt closer scrutiny of the vendor’s VAT position upon exit, particularly where enterprise assets remain in the business.”

An important consideration

Paschini and Langton said the increase in the threshold also raises an important policy question regarding its interaction with the deemed supply provisions in section 8(2).

Historically, when the VAT registration threshold has been increased, the National Treasury has considered the interaction between the threshold and the deemed supply provisions.

“It remains to be seen whether similar clarification or relief may be contemplated in the current context,” they noted.

Until such clarity emerges, vendors considering deregistration should proceed carefully and ensure they fully understand the potential VAT consequences of section 8(2) before exiting the VAT system.

Paschini and Langton explained that many businesses view VAT deregistration as a means of simplifying compliance.

“In reality, it is a tax event that may carry immediate financial consequences.” Before taking steps to deregister, vendors should carefully consider:

• The goods and rights currently forming part of the assets of the enterprise
• Whether input VAT was previously claimed on those assets
• The potential output VAT that could arise under the deemed supply rules
• Potential exclusions contained in the provisos to section 8(2)

“Failing to evaluate these factors may result in an unexpected VAT liability arising at the precise moment the business believes it is simplifying its tax affairs.”

Paschini and Langton added that while the increase in the VAT registration threshold to R2.3 million may create opportunities for some businesses to exit the VAT system, deregistration is not always a simple administrative step.

“Where enterprise assets remain in the business, the deemed supply rules may trigger a once-off VAT liability, even though no assets have been sold and no cash has been received.”

“Until the position is clarified, vendors should approach VAT deregistration with caution. Stepping out of the VAT system may prove far more expensive than remaining in it.”