BEYOND THE THRESHOLD: WHY VAT DE-REGISTRATION MIGHT COST YOU MORE THAN YOU THINK

Whenever I try to think about the long-term impact of any policy or legislative change in our industry, I remind myself of the old varsity joke about the student who asked his history professor what he thought of the French Revolution. "It’s too early to say," the prof replied.

When Finance Minister Enoch Godongwana raised the compulsory VAT registration threshold to R2.3 million earlier this year, a collective exhale rippled through the SME community, but many did not think about the long-term repercussions.

For years, smaller enterprises have buckled under the compliance weight of a limit stuck in 2009. Relief, naturally, came as an immediate emotional response.

Now, six months on, we are starting to see the real impact. Many of those who rushed into submitting deregistration applications are filtering through the system now. And as we sit down with clients across our practice, from nimble startups to mature enterprises, a sobering reality is settling in. Many business owners viewed the new threshold as a mandatory exit sign rather than what it actually was: namely, a strategic tool.

If you’re thinking of jumping at the chance to drop out of the VAT system without stress-testing your long-term strategy, it might be a good time to hit the pause button and to rethink your way forward.

Here is how business leaders and executives should weigh the real pros and cons of staying versus leaving the VAT net.

 
THE CROWNING GLORY OF DEREGISTRATION (THE PROS)

Let’s be fair: stepping away from the VAT system has genuine operational upsides for the right business model.

Cash flow and Administration
Compliance isn't free. The sheer hours spent reconciling tax invoices, filing bi-monthly returns, and managing SARS correspondence represent a heavy administrative tax on lean operations and finance teams.
 
Pricing Power for B2C Models
If your end-consumers are everyday individuals who cannot claim input tax, charging 15% VAT makes you inherently less competitive against micro-operators sitting below the threshold.
Deregistering allows you to either pocket a healthier margin or pass that 15% saving straight to the customer.
 
 
THE HIDDEN TRAPDOORS (THE CONS)

Unfortunately, business strategy is rarely that simple. Rushing into deregistration often triggers unintended consequences that short-term savings cannot mask.
 
The Output Tax Exit Bill
Deregistering is not a clean break on day one. SARS treats the cancellation as a deemed supply of all enterprise assets such as stock, equipment and vehicles at current market value. Writing that once-off check can catch even well-capitalized businesses off guard.
SARS may still require the accounting to be completed for each VAT period, even for zero VAT payable or refundable, until the final deregistration letter is officially issued, which could take a couple of weeks if not months to finalise.

The B2B Margin Squeeze
If your clients are other VAT-registered corporations, dropping out is usually a strategic misstep. Corporate clients care about net cost. When you stop charging VAT, they lose their input tax deduction. Suddenly, your services are 15% more expensive to them, forcing you to discount your fees just to stay in the game.
 
The Input Tax Forfeiture
When you deregister, you lose the ability to reclaim the 15% VAT paid on your own operational expenses, overheads, and inventory. For capital-heavy businesses, those recovered amounts often outweigh the administrative burden of staying registered.
 
 
A SIX-MONTH REALITY CHECK

We are currently seeing clients whose de-registrations have been approved in principle by SARS, but are still lingering in administrative limbo without final formal sign-off. This creates a dangerous grey zone where premature changes to billing systems collide with outstanding compliance obligations.

More importantly, consider your trajectory. If your turnover is hovering around R1.8 million and your strategic growth plan points north of R2.3 million within the next eighteen months, deregistering now is a form of corporate gymnastics.

Bouncing out of the system now, only to claw your way back in a year from now introduces chaotic software reconfigurations, invoicing headaches, and can lead to customer confusion.
 

A MORE CALCULATED APPROACH

The R2.3 million threshold is an opportunity for more operational flexibility, not a directive. Before you finalize any structural shifts, look past the immediate compliance relief.

Audit your client base, map your asset register, and align your tax posture with where your business will be in three years, not just where it sits today.

Review past financial records and pay close attention to making more realistic revenue projections to create a fair future state of your business enterprise. Compliance should always serve your strategy, not hijack it.

As you review your mid-year financials against the updated thresholds, how confident are you that your current VAT status is actually supporting your long-term growth targets? Financially astute enterprises will take the time to think carefully about their next steps.
 
 
Contact us at +27 82 561 7024 or myrtleo@mbasa.org for a free, no-obligation consultation, and let’s ensure you make the right decision, for the right reasons.