VAT Threshold Increase: Relief for Small Businesses – But Think Before Deregistering

SARS announced an increase in the VAT registration threshold in the 2026 National Budget Speech on the 25^th February 2026 with an effective date of 1^st April 2026.  The compulsory registration threshold was increased for the first time since 2009, rising from R1 million to R2.3 million in annual turnover.

The voluntary registration threshold was also increased from R50 000 to R120 000.

This is a significant change that offers many small businesses relief from VAT administrative burdens. However, deregistering is not an automatic nor always beneficial decision. Here’s a breakdown of the SARS requirements and critical considerations.

You can apply for voluntary deregistration if you can satisfy SARS that your taxable turnover in the next 12-month period will not exceed R2.3 million. The key requirements and process are:

1. Formal Application: You must complete and submit the VAT Form VAT 123 (Application for Cancellation of Registration) to SARS. This can be done via eFiling.
2. Proof of Future Turnover: You must declare and provide evidence that your future taxable turnover will not exceed the threshold. SARS may request documents like:
   • Recent financial statements.
   • A credible business forecast or budget.
   • Signed contracts (or lack thereof) indicating reduced activity.
   • Evidence of business closure or scaling down.
3. Final VAT Return: You must submit a final VAT return (VAT 201) for the period up to your chosen cancellation date. This return is crucial.
4. Settle all liabilities: You must pay any outstanding VAT debt, including the VAT due on the final return.
5. Account for VAT on Assets: This is the most complex requirement. On your final return, you must account for Output Tax on the market value of any assets on hand at the date of deregistration, if:
   • You claimed input tax on them when you purchased them, AND
   • The total value of these assets exceeds R50,000.
   • Common assets affected: Trading stock, equipment, vehicles, computers, and furniture.

Critical Things to Consider Before Choosing to Deregister

Do not deregister simply because you qualify. It is imperative to consider these financial and operational implications:

1. Loss of Input Tax Claims
   1. Biggest Disadvantage: Once deregistered, you can no longer claim back the VAT you pay on business expenses (input tax). This becomes a pure cost, increasing your expenses by up to 15%.
   2. Impact: This can significantly affect your cash flow and profitability, especially if you have high capital expenses (like new equipment) or ongoing costs with high VAT (like rent, software subscriptions, or professional fees).

2. VAT on Assets (Deregistration Charge)

As mentioned above, the potential “deregistration output tax” can create a sizable, unexpected VAT liability in your final period. You must budget for this cash outflow.

3. Customer Perception and Competitiveness
   1. Some clients, particularly larger businesses and government, prefer to deal with VAT-registered vendors so they can claim their own input tax.
   2. If your competitors are VAT-registered and you are not, your prices will be 15% cheaper for non-VAT registered customers (like private individuals), but for VAT-registered clients, your price becomes less competitive because they cannot reclaim VAT unless you charge 15% less than your VAT registered competitors.

4. Future Growth and Administrative Burden
   2. If your turnover is likely to exceed R2.3 million again in the future, you will be forced to re-register. The administrative hassle of deregistering and re-registering may outweigh the benefit.
   3. Staying registered forces you to maintain regular bookkeeping and VAT records, which is good financial discipline.

5. Cash Flow Implications
   1. As a Registered Vendor: You may have a cash flow advantage if you are on the Invoice Basis (compulsory for close corporations and companies and optional for sole proprietors). You collect VAT from customers before you have to pay it to SARS (usually at the end of the period).
   2. As a Non-Registered Business: You lose this timing benefit. VAT on your expenses is paid immediately to your suppliers.

Decision-Making Checklist

Ask yourself these questions before choosing to deregister:

• What are my major expenses? If I buy a lot of VAT-bearing goods/services, can I absorb the 15% cost?
• Who are my main clients? Are they VAT-registered businesses or final consumers?
• Am I planning any large asset purchases? If yes, consider the effect of not being VAT registered and not being able to claim the 15% VAT.
• What is my business trajectory? Is the low turnover temporary or permanent?
• Have I calculated the “deregistration output tax” on my assets? Can I afford this payment?
• Is the administrative saving worth the potential loss of customer base and increased costs?

Recommendations before deregistering for VAT –

1. Model the Numbers: Do a 12-month projection comparing your net cash position if you stay registered (claiming input tax) vs. deregistered (not claiming input tax). Include the one-time deregistration tax on assets.
2. Consult a Professional: Speak to your accountant or a tax practitioner. They can help you with the calculation, ensure you comply with the asset rules, and consider aspects specific to your industry.

While the increased threshold provides an option to deregister, it is not automatically the best financial decision. The loss of input tax claims is a serious cost that often outweighs the benefit of reduced administration, especially for businesses with significant expenses.

 

Written by Mandy Roesstorff

BVSA Port Alfred Director