While the amendment is widely welcomed as a measure aimed at easing the compliance burden on small and medium enterprises (SMEs), it raises an important practical question for many existing SME VAT vendors: should they remain registered for VAT, or should they consider cancelling their VAT registration?

Currently, a person is obliged to register as a VAT vendor where they make taxable supplies (being standard-rated and zero-rated supplies) in excess of R1 million in any consecutive period of 12 months. This compulsory VAT registration threshold will increase to R2,3 million from 1 April 2026.

A person who has not exceeded the compulsory VAT registration threshold may currently voluntarily register for VAT where they have already made taxable supplies exceeding R50,000 in a 12-month period, or where they carry on an enterprise and have not yet exceeded the R50,000 threshold but reasonably expect that the threshold will be exceeded within 12 months from the date of registration. As part of the proposed amendments, the voluntary registration threshold will also increase from R50,000 to R130,000 from 1 April 2026.

Registration as a vendor comes with certain onerous compliance requirements that can be administratively burdensome, time consuming and costly for small or start-up businesses that do not have sufficient administration resources. Such businesses may incur costs associated with acquiring the services of an accountant and implementing accounting systems to ensure accurate VAT reporting.

If the cost and administrative burden associated with VAT registration is weighed against the monetary benefit obtained from claiming input tax deductions upon registration, a business may decide that it is more beneficial to cancel its VAT registration.

This will particularly apply to businesses providing personal services, such as consultancy and medical services practitioners, where minimal input tax deductions are claimable, and where customers are not entitled to deduct the VAT charged by the service provider.

The increase in the VAT registration threshold, which has now finally been adjusted for inflation, therefore comes as a welcome reprieve for many SMEs who previously found themselves obliged to register under the current threshold of R1 million, a figure that in today’s economic context, could easily be reached by growing SMEs. Many VAT registered SMEs may now find that they are no longer obliged to remain registered as vendors on the basis that the value of their taxable supplies falls below the new R2,3 million threshold.

By way of a simple example, consider a consulting business generating annual taxable income of approximately R1,5 million. Under the current threshold, the business would be obliged to register as a VAT vendor and account for output tax on its supplies. Under the increased threshold of R2,3 million, however, the business may elect to cancel its VAT registration.

Implications and process

The increase in the compulsory VAT registration threshold will only take effect from 1 April 2026. Accordingly, SMEs that have exceeded the current VAT registration threshold of R1 million (but not the new R2,3 million threshold) and who are not registered for VAT, may still be required to register and to account for VAT on their supplies until 31 March 2026, retrospectively from the date this threshold was exceeded. 

In terms of section 24 of the Value-Added Tax Act 89 of 1991 (VAT Act), a registered vendor may apply to the Commissioner to cancel its VAT registration if the value of its taxable supplies will be less than the compulsory registration threshold in any consecutive period of 12 months. Furthermore, the Commissioner may cancel the VAT registration of a vendor that no longer meets the requirements for compulsory or voluntary registration.

Consequently, many SMEs currently registered on a compulsory basis that no longer meet the increased R2,3 million threshold may elect either to cancel their VAT registration or to remain registered on a voluntary basis.

Vendors that are registered on a voluntary basis, but that no longer meet the increased voluntary registration threshold of R130,000, will not be able to elect to remain registered and will instead be required to deregister for VAT purposes.

In order to deregister as a VAT vendor, an application in writing must be made to the South African Revenue Service (SARS) requesting the cancellation of VAT registration in accordance with section 24 of the VAT Act. A form VAT123e, available on the SARS website, must be completed and submitted to SARS. The circumstances under which the cancellation is requested must be clearly stated on the form or in a separate letter.

Upon application for cancellation of registration, SARS will respond with an acknowledgment letter and will advise on the vendor’s final tax periods. SARS will also provide further instructions regarding the deregistration process. Importantly, the vendor must continue to charge and declare VAT on supplies made, and deduct any input tax, up to the last day of its final tax period, as advised by SARS.

The cancellation of a vendor’s VAT registration is not merely an administrative action, but it also comes at a VAT cost. When a person ceases to be a vendor, section 8(2) of the VAT Act deems the assets of the person to have been supplied immediately before the person ceased to be a vendor. These assets include any capital goods, consumables and trading stock (other than goods in respect of which an input tax deduction was denied under section 17(2)) and any rights capable of assignment, cession or surrender forming part of the assets of the person’s enterprise.

VAT must therefore be accounted for on the lesser of the cost or open market value of all enterprise assets still on hand in the tax period in which the vendor’s registration is cancelled. In other words, the vendor will be required to account for output tax in respect of the deemed disposal of all enterprise assets on hand immediately prior to the cessation of its vendor status in its final VAT return submitted to SARS.

It should be noted that the VAT Act makes provision for the Minister to issue regulations prescribing the tax period in which such deemed output tax is payable. To date, no such regulations have been issued. However, following the previous increase in the VAT registration threshold in 2009, taxpayers deregistering as a result of the threshold increase were permitted to pay the deemed output tax in instalments over a period of six months. It is expected that similar measures could be introduced in due course.

Conclusion

Although the proposed increase in the VAT registration threshold is a welcome amendment to the VAT legislation, vendors considering deregistration should remain mindful of the potential consequences that may arise. In particular, the immediate tax cost that may arise from any deemed output tax liability upon deregistration should be carefully evaluated against any anticipated benefits from reduced VAT compliance obligations.

Ultimately, whether deregistration is beneficial will depend on the particular circumstances of each enterprise, including its pricing structure, client base and input tax position. SMEs that now fall below the new R2,3 million threshold are therefore advised to carefully assess these factors before making a decision to deregister.

It is hoped that the increase in the VAT registration threshold will have the desired effect of enabling SMEs to participate more robustly in the economy without the reluctance often associated with the administrative and compliance burden of VAT registration.