Watch out for VAT increases at the till

South Africans should exercise caution once the new 0.5 percentage point VAT hike kicks in on 1 May 2025. Some businesses may adjust prices at checkout without updating individual price tags.

This is according to Tax Consulting South Africa accountant Lee-Ann Nagel, who warned that consumers could pay more at the till than the individual product price ticket indicates.

“This is indeed in order as long as the VAT-registered vendors prominently display notices in their shops informing customers that the price on the ticket does not include the new VAT rate,” Nagel said.

“The Commissioner of the South African Revenue Service (SARS) has given permission that VAT vendors may increase the price of products in stores to include the higher rate of 15.5% without having to change all the individual price tickets, provided customers are duly informed.”

In guidance documents about the VAT increase, SARS advised that this notice should also include, with equal prominence, an example of the old and new prices of one of the products and how the adjustments will be made at the point of sale.

“The notices should be prominent at all entrances to the premises where the goods or services are displayed for sale, at all points of sale where payments are made or tax invoices issued and in all print and electronic advertising media and websites.”

“The notices should be removed by no later than the end of August 2025.”

In an FAQ document, SARS answered this and other questions from vendors and members of the public about the rate increase to clarify and ensure consistency on certain practical and technical aspects of implementing the higher VAT rate.

“Since the announcement of a VAT increase of 0.5% in the 2025 Budget, big corporates and small businesses have been working around the clock to ensure their pricing and accounting systems are ready to reflect the VAT rate of 15.5% from 1 May 2025,” Nagel said.

“The time it takes companies to adjust to the change depends on their reporting standards.”

Nagel said large companies that pay for up-to-date accounting systems, such as Sage and Xero, and have dedicated accountants for their monthly returns will likely have it easier.

This is because their systems would already have a contingency in place for changing VAT rates across the board.

“Smaller companies with more simplistic reporting systems may have to manually work through the VAT rates they apply and adjust the rates for all VAT products.”

“It may take additional time to adjust the pricing of newly zero-rated products, including edible offal, dairy liquid blends and canned vegetables.”

According to Nagel, the VAT Act allows for product price increases and recovers the increased tax from the customer.

“Although the vendor can decide if he is going to increase prices, it must be noted that a pricelist is effectively advertising, and prices advertised or quoted are deemed to be inclusive of VAT,” she said.

“Customers will only pay the price they see advertised, quoted or displayed.”

SARS clarified that whether businesses increase their price or not, their point of sale and accounting systems must be set up to charge and declare VAT on the final price at the increased rate for supplies made on or after 1 May 2025.

Nagel noted that the most immediate and visible effect of the VAT increase is the rise in businesses’ operational costs.

“With the rate increase, the cost of goods and services also increases, thereby raising the cost of production.”

“VAT-registered vendors can offset these increased costs by claiming input tax credits, but non-VAT-registered small businesses will bear the full burden of the higher operational expenses.”

“The VAT increase is expected to strain cash flows, particularly for small and medium-sized enterprises (SMEs) with limited budgets.”

Nagel added that some businesses may need to absorb part of the VAT increase to remain competitive and retain their customer base.

Not all businesses will be able to fully pass on the higher costs to consumers, which could squeeze profit margins.

“The overall financial impact on companies will differ due to the hugely varied systems used for financial reporting.”

“However, taking into account the additional time spent by administrators and accountants to mitigate the risk of errors in the VAT returns and financial statements, companies will likely notice the increased cost.”

Nagel explained that besides direct cost increases, businesses will face additional indirect financial pressures, such as the rising cost of compliance.

“Companies will need to adjust their accounting systems, invoicing procedures, and reporting practices to reflect the new VAT rate, which will involve both administrative time and financial outlay.”

“These adjustments will be required from 1 May 2025 and again 1 April 2026 as the VAT rate increases incrementally.”

Nagel stressed that businesses should also be careful of the timing difference.

“All companies will face the difficulties of the timing difference between the issuance of invoices and either paying suppliers or receiving pro-forma customer payments around 1 May 2025 and again around 1 April 2026.”

For example, companies that regularly receive stock from suppliers and only make out the invoices afterwards or projects that were partially invoiced before the rate change, for which the second portion would need to be accounted for at the increased rate.

Anywhere there could be a timing difference between an initial order and the issuance of the invoice would be an at-risk transaction for reporting errors – ordering of stock, making out quotations or pro-forma invoices, and credit accounts.

“VAT returns in 2025 for uneven periods (April/May) will need to be split between 15% and 15.5% rates, which will slow down VAT processing and require careful investigation of all supporting documentation during the period to avoid reporting errors.”

“There is a real concern that the eFiling system may be swamped with verifications and/or requests for corrections, which could significantly slow down SARS processes and VAT refunds.”

In addition, businesses also need to be aware of market-related impacts, Nagel added.

“The VAT increase will also have widespread effects on consumer behaviour and spending patterns to favouring essential goods and services over discretionary purchases.”

“This may lead to increased demand for zero-rated items while non-essential goods could experience reduced consumer spending.”

The upcoming VAT increase is designed to generate an estimated R28 million in additional revenue for the fiscal year 2025/26 to help fund the Government’s spending priorities in fulfilling its service delivery mandate, Nagel said.

However, it does present several challenges for businesses and consumers alike.

“From higher operational costs to changes in consumer behaviour and increased compliance burdens, the economic landscape will become more complex.”

“Businesses, particularly SMEs, will need to adjust their strategies, tighten financial management, and remain agile in response to these fiscal changes.”