As the new VAT threshold takes effect, small businesses in South Africa face a pivotal decision that could shape their operations and profitability. This article delves into the complexities of deregistering for VAT, exploring both the potential advantages and hidden implications for SMEs.
Image: Timothy Bernard / Independent Newspapers
With the introduction of a new compulsory VAT registration threshold on 1 April, South Africa's small and medium enterprises (SMEs) are at a crucial crossroads.
The limit has now been raised from R1 million to R2.3 million, prompting many business owners to reconsider their VAT registration status.
While this change is aimed at relieving the compliance burden for SMEs, the decision to deregister or remain a VAT vendor is not as straightforward as it may appear.
For many, the instinct might be to deregister, spurred by the promise of reduced administrative obligations and potential cost savings.
However, experts from SME funder Lula stress that business owners should approach this significant decision with caution.
“The threshold increase is a positive move in reducing administrative pressure on SMEs,” said Shaheeda Solomon, Finance Manager at Lula.
Shaheeda Solomon, Finance Manager at Lula
Image: Supplied.
“But deregistering for VAT is not just an administrative step; it’s a tax event which can trigger immediate tax liabilities that businesses may not have planned for.”
For those that now fall below the threshold, deregistration can yield several advantages, including the cessation of VAT return submissions and pricing benefits, especially for businesses focused on direct sales to consumers.
“If you’re selling directly to individuals, removing VAT from your pricing can make your offering more competitive, or at the very least, boost your profit margins,” Solomon added.
However, the advantages come with a crucial caution: business owners must carefully weigh these against the losses that deregistration incurs.
One of the most significant drawbacks of dereguistering is forfeiting the ability to claim input VAT on business expenses.
In this scenario, any VAT previously recoverable on purchases suddenly becomes unrecoverable, turning into an additional cost burden for the business.
“That’s often the hidden impact,” warned Solomon.
“Expenses that were previously marketable suddenly become more expensive, eroding any margin saved from deregistration.”
The implications of the decision can fluctuate significantly based on the business model.
For companies with low overheads and a consumer-facing clientele, the decision to deregister might pose minimal risk.
Conversely, businesses with high input costs or those catering predominantly to VAT-registered companies may find the consequences more pronounced. “If your customers are VAT-registered, they typically expect you to be VAT-registered too, enabling them to claim VAT on your invoices,” Solomon said, noting that for these businesses, deregistration could render pricing a disadvantage.
Another pivotal factor to consider is cash flow.
While remaining VAT-registered requires navigating additional administrative processes, deregestering can present a more predictable cash flow situation, allowing businesses to retain all incoming revenues without having VAT obligations.
However, companies must also look ahead; those flirting with the new R2.3 million threshold must prepare for a potential return to the VAT system.
“Once you exceed the threshold, you have 21 business days to register as a VAT vendor, and SARS is strict on enforcement. We typically advise businesses nearing around R1.8 million in turnover to start preparing by tidying their bookkeeping and establishing systems to manage VAT compliance,” Solomon said.
Ultimately, Solomon encourages SMEs to avoid treating VAT registration as a mere administrative tick-box exercise.
Instead, it should be framed as a strategic business decision.
“There’s no one-size-fits-all answer. The right choice depends on your customers, your cost structure, and your growth trajectory. What’s most important is that business owners fully grasp the implications before making the decision,”Solomon said.
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