VAT threshold increase gives SMEs more choice, but not always a simpler one

Small business owners may very well be asking themselves whether they should deregister for VAT, following the 1 April change in the compulsory VAT registration threshold. While the change (from R1 million up to R2.3 million) will ease the compliance burden for small to medium enterprises (SMEs) and offer them greater flexibility, the decision to deregister or not is far from a simple one.

For many business owners, the instinct may be to opt out. SME funder Lula cautions that the decision is far from straightforward and should be approached with careful consideration of both the financial and operational implications.

“The threshold increase is a positive move in reducing administrative pressure on SMEs,” says Shaheed Solomon, finance manager at Lula. “But deregistering for VAT is not just an administrative step; it’s a tax event that can trigger immediate liabilities that businesses may not have planned for.”

For SMEs that now fall below the threshold, deregistration can offer clear benefits. These include reduced compliance requirements, such as no longer needing to submit VAT returns, as well as potential pricing advantages, particularly for businesses that sell directly to consumers.

“If you’re selling directly to individuals, removing VAT from your pricing can make your offering more competitive, or improve your margins,” Solomon explains. “But that benefit needs to be weighed carefully against what you lose.”

One of the most significant trade-offs is the ability to claim input VAT on business expenses. Once deregistered, any VAT paid on purchases effectively becomes a cost to the business. “That’s often the hidden impact,” says Solomon. “Expenses that were previously recoverable suddenly become more expensive, which can erode the margin gain from deregistering.”

The impact of this decision can vary significantly depending on the business model. For SMEs with low overheads and a predominantly consumer-facing customer base, deregistration may have minimal downside. However, for businesses with high input costs or those that primarily serve other VAT-registered companies, the consequences can be more substantial.

“If your customers are VAT-registered businesses, they generally expect you to be VAT-registered too, so they can claim VAT on your invoices,” Solomon notes. “If you’re not, your pricing becomes effectively more expensive to them.”

Cashflow is another important consideration. While being VAT-registered introduces additional administrative processes, deregistered businesses may benefit from more predictable cashflow, as all incoming revenue belongs directly to the business without VAT obligations.

Beyond the immediate decision, SMEs should also be thinking ahead. Businesses approaching the new R2.3-million threshold need to ensure they are prepared to re-enter the VAT system if required.

“Once you exceed the threshold, you have 21 business days to register, and SARS is strict on enforcement,” Solomon says.

“We typically advise businesses nearing around R1.8 million in turnover to start preparing by cleaning up their bookkeeping and putting systems in place to manage VAT compliance.”

Ultimately, she advises SMEs to avoid viewing VAT registration as a simple tick-box exercise and instead treat it as a strategic business decision.

“There’s no one-size-fits-all answer,” Solomon says. “The right choice depends on your customers, your cost structure and your growth trajectory. What’s important is that business owners fully understand the implications before making the call.”

Image credit: Freepik/bugphai