The upcoming increase in the VAT registration threshold to R2.3 million in April 2026 has been welcomed by many smaller businesses in South Africa. However, for vendors whose turnover now falls below the new threshold, the question arises: should they deregister from the VAT system? At first glance, deregistering may seem like the logical next step, but what appears to be a simple compliance decision can quickly become a costly tax event.
Hidden within the VAT Act is a provision that can trigger a once-off VAT liability at the very moment a business exits the VAT system. Many vendors only become aware of this rule after they have already taken steps to deregister. The little-known rule that can trigger a VAT bill overnight is found in section 8(2) of the Value-Added Tax Act, No. 89 of 1991, which deems certain goods and rights forming part of the assets of the enterprise to have been supplied immediately before deregistration.
VAT Implications of Deregistration
In practical terms, this means that the vendor may be required to account for output VAT at the standard rate of 15% on the value of those assets, even though no actual sale has taken place and no cash has been received. Where input VAT was previously claimed on these assets, the VAT system effectively recovers that input tax through the deemed supply mechanism at the point of deregistration. For many businesses, this is the stage where what appeared to be a straightforward administrative decision unexpectedly results in a VAT liability becoming payable to the South African Revenue Service (Sars).
Over time, most businesses accumulate goods and rights forming part of the assets of the enterprise on which they claimed input VAT. These may include equipment, vehicles, and property. When a vendor deregisters while these assets remain in the enterprise, the deemed supply rule in section 8(2) may apply to their value. Because many of these assets were not acquired for immediate resale, vendors may not anticipate that they may effectively be treated as taxable supplies at the point of deregistration.
Understanding the Deemed Supply Rule
As a result, a business may only discover the VAT implications when calculating the final VAT position upon exit from the VAT system. For businesses with significant historical input VAT claims, the amount involved can be substantial. The South African Revenue Service provides guidance on the VAT registration threshold and the implications of deregistration. The increase in the compulsory VAT registration threshold announced in the 2026 National Budget was introduced to reduce the compliance burden for smaller enterprises. However, the change in the threshold does not override the operation of the deeming provisions contained in the VAT Act.
To avoid unexpected VAT liabilities, businesses should carefully consider the implications of deregistering from the VAT system. They should seek professional advice to ensure they understand the VAT implications of their decision. A list of key considerations includes:
- Reviewing the business’s current VAT registration status
- Assessing the value of assets on which input VAT was claimed
- Calculating the potential VAT liability upon deregistration
- Seeking professional advice to ensure compliance with the VAT Act
By understanding the VAT implications of deregistration, businesses can make informed decisions and avoid unexpected tax liabilities. The National Treasury website provides information on the VAT registration threshold and the implications of deregistration.
