Expectedly, the increase in South Africa’s compulsory VAT registration threshold from R1 million to R2.3 million – effective 1st April 2026 – has been well received, particularly by small and medium enterprises (‘SMEs’). While the adjustment reduces the number of businesses required to register for VAT, it also raises a critical question: Should qualifying vendors remain registered for VAT, or consider deregistration? At face value, VAT deregistration may appear to be a straightforward way to reduce administrative burdens for SMEs. In reality, it could trigger potentially significant tax and commercial consequences.
Understanding VAT and business impact on SMEs
Under South Africa’s Value-Added Tax Act (‘the VAT Act’), businesses exceeding the prescribed threshold must register for VAT and charge tax on their supplies. In return, they are entitled to recover input VAT incurred on qualifying expenses.
For businesses with substantial input costs or VAT-registered customers or clients, this system is advantageous. For others, especially service-focused SMEs with limited expenses, the compliance burden may outweigh the benefits.
Against this backdrop, the previous R1 million threshold had increasingly captured businesses that lacked the resources to manage VAT compliance effectively. Accordingly, the threshold adjustment was designed to ease regulatory pressure on smaller enterprises, improve growth and cash flow, and account for inflation over time.
Crucially, the practical effect of this change is that businesses with annual taxable supplies below R2.3 million are no longer compelled to remain registered for VAT. This creates flexibility: VAT vendors may apply to deregister or choose to remain registered voluntarily where it is commercially sensible, provided they meet the relevant requirements.
However, this choice is not always entirely discretionary. Where a vendor no longer satisfies the criteria for voluntary registration – now increased from R50 000 to R120 000 per year – deregistration may be required. For many SMEs, particularly those in consulting or professional services, the new threshold opens the door to simpler operations and reduced compliance costs.
The benefits of VAT deregistration for SMEs
From a practical standpoint, deregistering from VAT can offer meaningful advantages:
- No VAT returns, reconciliations, or ongoing compliance requirements lessen administrative burdens;
- Lower professional costs, namely reduced reliance on accountants; and
- Businesses serving individual consumers may become more competitive by not charging VAT.
Critically, these benefits are most relevant where input VAT claims are minimal and customers are unable to recover VAT.
The hidden cost: Exit VAT
Despite these advantages, deregistration carries a significant and often underestimated risk.
When a vendor ceases to be registered, section 8(2) of the VAT Act deems certain assets of the business to have been supplied immediately before deregistration. This includes trading stock, equipment, and other enterprise assets on which input VAT was previously claimed.
As a result, the business intending to deregister must account for output VAT using the tax fraction (15/115) applied to the lower of the cost or open market value of those assets. Importantly, this liability arises without any actual sale or cash inflow.
In addition, VAT may also become payable on certain creditor balances where input VAT was previously deducted but remains unpaid at the time of deregistration.
For asset-rich businesses, this can translate into a substantial once-off tax liability, which effectively reverses prior input VAT benefits.
Why VAT deregistration goes beyond an administrative decision
A common misconception is that VAT deregistration simply removes compliance obligations for SMEs. In reality, it constitutes a tax event that must be carefully managed.
Before applying to deregister, businesses should evaluate:
- The nature and value of assets held in the enterprise;
- Whether input VAT was claimed on those assets;
- The nature of their customer base;
- Any outstanding creditors linked to prior input claims;
- The resulting VAT liability under the deemed supply rules; and
- The long-term commercial impact of deregistration.
While certain exclusions exist, such as assets on which input VAT was denied, these are limited and do not eliminate the broader risk.
In practice, deregistration may also attract closer scrutiny from the South African Revenue Service (‘SARS’), especially in instances where significant assets remain within the business.
As such, businesses must continue to account for VAT on all supplies up to the final tax period and comply with any SARS requirements throughout the deregistration process.
Historically, in similar threshold adjustments, relief measures such as instalment payment options for exit VAT have been considered. However, no formal confirmation of such relief has been issued for the current change.
Undoubtedly, the threshold increase to R2.3 million presents a genuine opportunity for SMEs to streamline operations. However, deregistration is not always the most cost-effective outcome. In some cases, remaining voluntarily registered may be the more strategic choice.
Conclusion
While the increased VAT threshold offers welcome flexibility, it does not remove the complexities associated with deregistration. For SMEs, understanding both the benefits and the risks of VAT deregistration ensures that the opportunity created by the new threshold is not undermined by unintended tax liabilities.
For commercial-focused guidance, contact our experienced team of attorneys.
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