The new Value Added Tax (VAT) registration threshold increased to R2.3 million on 1 April 2026 – a long-awaited relief for small businesses and consumers across the country.
The change was announced by our Minister of Finance, Enoch Godongwana at the Budget Speech held on 25 March 2026.
Before the increase, the compulsory VAT registration threshold was R1 million in taxable turnover over 12 months. This threshold remained unchanged for 17 years since 2009.
At Lula, we lobbied for the VAT threshold change.
As strong supporters of small businesses in our country and their success, we are proud to have been a part of the change. In October 2025, we made a formal submission to the Treasury for the VAT threshold to be increased to R3 million.
Our Chief Risk Officer, Garth Rossiter, says that the R2.3 million increase represents a significant victory for the sector and is a clear signal that the National Treasury is responding to the strategic advocacy for more pragmatic SME tax policies.
“For years, the R1 million threshold acted as a glass ceiling for growth. Many small businesses deliberately capped turnover to avoid the administrative and cash flow burden of VAT compliance. Raising the threshold is a practical, pro-growth reform that will immediately unlock productivity in the SME sector.”
While voluntary registration is still permitted if taxable supplies are between R50,000 and R120,000, if your business has a turnover that falls below the threshold, you may naturally be asking: If VAT registration is no longer compulsory, why remain in the system?
Logically, deregistering may seem like the best way forward, but it can quickly become a costly exercise. Understanding how the new threshold works and how it applies to your business model can help you make the best decision.
Understanding the VAT Act
With the new VAT threshold increase, vendors whose taxable supplies exceed R1 million over any consecutive 12-month period, or are expected to exceed that amount, are required to be VAT registered and must begin filing output tax returns with SARS.
VAT is an indirect tax that is added to a product after it is taken from a raw material and improved.
It is designed to be paid mainly by consumers. It is levied at two rates: a standard rate of 15% and a zero rate (0%). Think of it as a ‘contribution’ or a percentage that SARS takes once ‘value’ is added to goods and services.
While it can seem like a price increase for your customers, it’s actually a multi-stage tax collected bit by bit along the way.
Under the VAT system, as a vendor, you’re entitled to a deduction of the VAT incurred on expenses paid for the purpose of producing taxable supplies.
The Case for VAT Deregistration: Is it Worth it?
If your business makes less than R2.3 million in a year, the new VAT threshold increase may seem like a relief.
If you decide to deregister, you’re exempt from filing bi-monthly VAT returns and no longer have to deal with the administration that comes with it.
Shaheeda Solomon, Finance Manager at Lula, says while deregistration has some advantages, there are consequences that should be considered before making the change.
“Although the increase in the turnover threshold is welcomed in order to reduce the compliance on SMEs, there are still consequences. Deregistration from VAT still counts as a tax event and not only an administrative exercise.”
The advantage is that it allows you to keep your prices competitive.
For example, if you’re a coffee shop owner, you can stop adding 15% VAT to your prices – making your products and services instantly more attractive compared to larger, VAT-registered competitors.
Solomon notes another advantage: “Deregistration reduces the administrative burden and compliance costs. You no longer need to submit VAT returns.”
While it may lower the cost of products and services, benefiting your customers, you can no longer claim back on VAT you pay on your own business expenses like rent, or equipment.
Additionally, under Section 8(2) of the VAT Act, any vendor who deregisters becomes liable for output tax or, what is more commonly known as, a ‘VAT Exit Charge’ of 15% on the value of all your business assets and rights, even on unsold product.
“This means, by deregistering as a VAT vendor, there may be tax consequences, resulting in an immediate VAT liability that may previously not have been accounted for,” says Solomon.
Assets include almost everything of value your business owns, such as:
- Laptops
- Machinery
- Office furniture
- Vehicles
- Trade stock
- Rights
Rights refers to legal documentation like patents, trademarks or even valuable contracts that your business holds. If it has value and can be transferred to someone else, you’ll be charged for it.
If you’re considering deregistering, carefully weighing the pros and cons can save you the pain of having to re-register later down the line if you feel it hasn’t really had any tangible financial benefit on your business.
The ‘VAT Exit’ Trap: Why VAT Deregistration Could Cost You
The purpose of the VAT Exit Charge is like a repayment for a previous discount. When you bought your assets or stock as a VAT vendor, SARS allowed you to claim the 15% VAT back (input tax).
They gave you that refund on the assumption that you would use those items to make sales and collect VAT for them in the future.
If you deregister, you are taking those assets ‘out of the system’. Since you won’t be charging VAT on sales anymore, the ‘VAT Exit Charge’ is a means to ‘recoup’ the tax benefits SARS gave you when you first purchased those assets.
Not all businesses are affected equally. “If you are a business with low overheads selling mainly to individuals, deregistration will have a minimal impact on your bottom line.
On the other hand, if you have high capital expenses or if your main clients are VAT-registered businesses, the impact of deregistration will be significant,” says Solomon.
What to Consider Before Making a Decision
Use this checklist before you make a decision to understand the impact for your business:
1. Check your ‘Exit VAT’ liability before applying
As we’ve mentioned earlier, deregistration isn’t free. Under Section 8(2) of the VAT Act, SARS considers deregistration a ‘deemed sale’.
This means you must pay 15% output VAT on the market value (or cost, whichever is lower) of all assets and stock you own at the time of exit, provided you claimed input tax on them originally.
For example, if your business owns R500,000 worth of equipment and stock, you could suddenly owe SARS R75,000 on your final return without having actually sold anything.
Before considering deregistration, perform a ‘mock’ final return to calculate this liability. If the amount is high, you may need to apply for the six-month instalment plan offered by SARS for exit VAT.
2. Review your client base (B2B vs B2C)
Deregistering might save you paperwork, but it could cost you customers.
If your clients are VAT-registered businesses, they will expect a VAT invoice so they can claim the 15% back.
If you stop charging VAT, you effectively become 15% more expensive to them unless you lower your prices.
If you sell directly to the public (who can’t claim VAT), deregistering allows you to either keep your prices the same and pocket the extra 15% margin or drop your prices to become more competitive.
3. Assess your accounting software’s transition capabilities
While the standard VAT rate remains 15% (following the withdrawal of the proposed 2026 increase), your status change requires a clean break in your digital records.
To do that you will need to stop generating ‘Tax Invoices’ and start issuing ‘Invoices’ on the exact date SARS confirms your deregistration.
You are still legally required to keep your VAT records for five years after deregistration. Ensure your software subscription or back-up method allows for this long-term access to financial records.
Don’t Trade VAT Relief for a Cash Flow Crisis
The shift to a R2.3 million threshold is more than just a numbers game; it’s a landmark victory for South African SMEs.
For the first time in nearly two decades, the ‘glass ceiling’ on growth has been lifted, allowing small businesses to scale without being immediately swallowed by VAT administration.
At Lula, we are incredibly proud to have advocated for this change that provides some relief for small business owners like you.
As you navigate this new landscape, don’t mistake a higher threshold for an automatic ‘exit’ sign.
While the prospect of fewer SARS filings is tempting, the VAT ‘Exit Charge’ and the loss of input tax credits can turn a ‘relief’ into a sudden cash flow crisis if not managed correctly.
