VAT threshold change brings relief — but a hidden catch for businesses
Businesses in South Africa are getting some breathing room after the National Treasury raised the VAT registration threshold — but opting out of VAT may come with consequences many didn’t anticipate.
Finance Minister Enoch Godongwana announced that the threshold has increased from R1 million to R2.3 million, effective 1 April 2026, as part of the 2026 Budget process.
The move follows public input highlighting that the previous threshold had remained unchanged for 17 years, despite rising business costs.
A welcome change for SMEs
For many small and medium-sized enterprises (SMEs), the higher threshold offers clear advantages:
- Less administrative burden (no VAT returns)
- Simpler pricing structures
- Potentially more competitive pricing for consumers
Businesses that sell directly to individuals, in particular, could benefit by removing VAT from their pricing — either improving margins or lowering prices.
But deregistering is not just paperwork
Despite the upside, experts warn that leaving the VAT system is not a simple administrative step.
Deregistering triggers what is effectively a tax event, which can result in immediate tax liabilities — something many businesses may not have planned for.
In other words: stepping out of VAT can come with a bill.
The biggest trade-off: losing input VAT claims
Once a business deregisters:
- It can no longer claim input VAT on expenses
- VAT paid on purchases becomes a direct cost
This can quickly eat into any gains from deregistration — especially for businesses with high operating costs.
Your business model matters
The real impact depends heavily on how your business operates:
✔️ Likely to benefit
- Low overhead businesses
- Consumer-focused businesses
⚠️ Higher risk
- Businesses with large input costs
- Companies serving other VAT-registered businesses
If your clients are VAT vendors, not charging VAT can actually make your services more expensive in their eyes, since they can’t claim it back.
Cash flow vs growth
There is a short-term upside:
- Revenue becomes simpler — no VAT portion to manage
- Cash flow may feel more predictable
But there’s a longer-term consideration.
If your business grows and crosses the R2.3 million threshold:
- You have 21 business days to register for VAT with the South African Revenue Service
- Late registration can lead to penalties
Plan before you act
Businesses approaching the new threshold should prepare early by:
- Cleaning up bookkeeping
- Setting up systems for VAT tracking
- Understanding their customer base and cost structure
Bottom line
The higher VAT threshold is a positive step — but deregistering isn’t a quick win.
It’s a strategic decision that depends on your margins, customers, and growth plans. Done without proper planning, it could cost more than it saves.
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