The R2.3m VAT Threshold: Opportunity for Small Businesses — With a Catch
Budget 2026 Insight: VAT Threshold Increase & What It Means for Businesses
VAT Registration Threshold Increased
From 1 April 2026, the compulsory VAT registration threshold will increase from R1 million to R2.3 million.
This means a business is only required to register for VAT once its taxable turnover exceeds R2.3 million within any consecutive 12-month period.
For many small businesses that are currently VAT registered, this change may create an opportunity to deregister from VAT if their turnover falls below the new threshold.
Understanding VAT Deregistration
A VAT vendor may apply to cancel their VAT registration if they expect their taxable supplies to be below R2.3 million over a 12-month period.
However, deregistering from VAT has important tax consequences that businesses must understand.
Final VAT Period
Even after applying for deregistration:
· The business must continue charging VAT on sales until SARS officially cancels the registration.
· SARS will issue a notice confirming the cancellation date and the final VAT tax period.
· The vendor must submit a final VAT return for that period.
Exit Tax on Assets (Deemed Supply)
When a business deregisters for VAT, the VAT Act treats the business as if it sold certain assets immediately before deregistration.
This is known as a deemed supply under Section 8(2) of the VAT Act.
This means the business must declare output VAT (i.e pay it) on certain assets still held, if input VAT was previously claimed on them.
Examples include:
· Trading stock
· Equipment and machinery
· Vehicles
· Livestock(if input VAT was claimed)
· Other business assets
Assets where no input VAT was claimed are generally not affected.
Property Considerations
Special rules apply to immovable property.
If the property:
· formed part of the VAT enterprise, and
· input VAT was previously claimed on the purchase, construction, or improvements
then output VAT must be declared on the market value of the property at the time of deregistration.
If the property is partly used for private purposes, VAT may only apply to the enterprise portion.
Example:
· 70% farming business
· 30% private residence
Only 70% of the property value may be subject to exit VAT.
Outstanding Creditors
If a vendor claimed input VAT on goods purchased on credit, but has not yet paid the supplier, SARS may require the vendor to repay VAT on the unpaid portion when deregistering.
This applies if deregistration happens within 12 months of claiming the input VAT.
Diesel Refund Scheme
If the business is registered for the Diesel Refund Scheme, deregistration from VAT also requires:
· Deregistration from the scheme
· Repayment of any diesel refund previously claimed on unused diesel stock
Valuation of Assets
Assets subject to exit VAT must be valued at their open market value immediately before deregistration.
However, an exception exists:
If the total market value of all assets (excluding property) is less than R100,000, the deemed supply rule may not apply.
Key Takeaway
Although the increased VAT threshold may allow some businesses to deregister from VAT, the process should be carefully evaluated.
Deregistration can trigger exit VAT on assets, property adjustments, creditor adjustments, anddiesel refund repayments, which could result in a significant once-off tax liability.
Professional guidance is recommended before proceeding with VAT deregistration.
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