Introduction: A Long-Awaited VAT Threshold Shift

South Africa’s proposed increase in the VAT registration threshold marks the first adjustment in nearly two decades. While this development is widely seen as a positive step for small and medium enterprises (SMEs), it introduces an important strategic decision for existing VAT vendors.

Businesses that may no longer be required to remain VAT registered must now evaluate whether deregistration is financially and operationally advantageous. This is not a purely administrative choice. It carries potential tax consequences that must be carefully weighed against any compliance savings.

Understanding the New VAT Registration Thresholds

At present, a business must register for VAT if its taxable supplies exceed R1 million within any 12 month period. From 1 April 2026, this compulsory registration threshold will increase significantly to R2.3 million.

In addition, the voluntary registration threshold will rise from R50,000 to R130,000. This change affects businesses that choose to register despite not meeting the compulsory threshold.

These adjustments aim to reduce the regulatory burden on smaller enterprises. However, they also create a scenario where many currently registered vendors may fall below the new thresholds.

Should SMEs Deregister for VAT?

The increase in thresholds prompts a key question for SMEs. Should they remain VAT vendors, or should they cancel their registration?

The answer depends on several business-specific factors, including pricing models, customer profiles, and the extent to which input VAT can be claimed.

For example, service-based businesses such as consultants or medical practitioners often incur limited input VAT. Where clients are unable to claim VAT, remaining registered may make services more expensive and less competitive. In such cases, deregistration could improve pricing flexibility.

Conversely, businesses with significant input costs may benefit from remaining registered to recover VAT on expenses.

Compliance Costs Versus Tax Benefits

VAT registration brings with it ongoing administrative responsibilities. These include filing returns, maintaining accurate records, and often engaging professional accounting services.

For smaller enterprises, these obligations can be time consuming and costly. Where the financial benefit of claiming input VAT is minimal, the compliance burden may outweigh the advantages of remaining registered.

The revised thresholds therefore provide relief for businesses that previously exceeded the R1 million limit but do not reach the new R2.3 million threshold in the current economic climate.

Timing and Transitional Considerations

The new thresholds will only take effect from 1 April 2026. Until that date, the current rules remain applicable.

This means that businesses exceeding the existing R1 million threshold before April 2026 are still required to register and account for VAT, even if they will fall below the new threshold once it comes into force.

The Legal Process for VAT Deregistration

In terms of section 24 of the Value Added Tax Act, a vendor may apply to cancel its VAT registration if it no longer meets the requirements for compulsory or voluntary registration.

An application must be submitted to the South African Revenue Service using the prescribed VAT123e form. The reasons for deregistration must be clearly stated, either within the form or in a supporting document.

Once the application is processed, SARS will confirm the final tax period and provide guidance on completing the deregistration process. Importantly, the vendor must continue to comply with VAT obligations until the effective date of cancellation.

The Hidden Cost of Deregistration

Deregistering for VAT is not without financial consequences.

Under the VAT Act, a business that ceases to be a vendor is deemed to have supplied all its enterprise assets immediately before deregistration. This includes trading stock, capital assets, consumables, and certain rights associated with the business.

As a result, output VAT must be accounted for on these assets. The amount payable is calculated based on the lower of cost or market value.

This deemed supply can create a significant once-off tax liability, which must be settled in the vendor’s final VAT return.

Potential Relief Measures

Although current legislation does not prescribe specific relief mechanisms, past adjustments to VAT thresholds have been accompanied by practical concessions.

For instance, when the threshold was previously increased, vendors were permitted to settle the deemed VAT liability over a period of months. Similar measures may be introduced again, although this remains uncertain.

Strategic Considerations for SMEs

Before deciding to deregister, businesses should conduct a comprehensive assessment of their position. Key considerations include:

The nature of the business and whether clients can recover VAT
The level of input VAT incurred on expenses
Pricing implications and competitiveness
The administrative cost of compliance
The potential once-off VAT liability on deregistration

A careful evaluation of these factors is essential to avoid unintended financial consequences.

Conclusion: A Decision That Requires Careful Planning

The increase in South Africa’s VAT registration threshold is a welcome reform that offers relief to many SMEs. However, the decision to deregister should not be taken lightly.

While reduced compliance obligations may be appealing, the immediate tax implications and broader business impact must be fully understood.

Each enterprise will need to assess its own circumstances to determine the most advantageous course of action. With proper planning and professional guidance, businesses can position themselves to benefit from the new thresholds while avoiding unnecessary risk.