Introduction

South Africa’s Value-Added Tax (VAT) system has been around for decades, but one key issue has remained stubbornly unchanged: the VAT registration threshold. Currently set at R1 million in annual turnover, this figure has not moved in years, despite inflation, rising costs, and the growing pressures small businesses face.

On paper, the system sounds fair, once your business turns over R1 million, you’re considered big enough to register for VAT. In reality, however, this frozen threshold places a disproportionate burden on small enterprises, squeezing their cash flow, raising compliance costs, and discouraging growth.

Let’s unpack why this matters, what it means for entrepreneurs, and what lessons small business owners should take away.

1. The VAT Threshold: What It Is and Why It Matters

VAT is a consumption tax added to the price of most goods and services in South Africa, currently at 15%. Businesses that exceed R1 million in turnover must register as VAT vendors, charge VAT on their sales, and remit it to SARS, while claiming back VAT on their business expenses.

For larger businesses, this is simply a compliance cost that comes with the territory. But for small businesses hovering around the threshold, VAT registration can be make-or-break.

Example: Imagine a small business that makes R1.2 million turnover annually. That sounds like a lot, but after expenses, their profit margin might only be R150,000. Suddenly, they must add VAT admin, pay accountants to file returns, and risk losing price-sensitive customers who balk at paying an extra 15%.

2. Why the Frozen Threshold Hurts Small Businesses

a) Inflation has eroded the threshold

The R1 million threshold was introduced years ago when R1 million meant far more in real economic terms. Adjusted for inflation, that figure today should be significantly higher, closer to R2 million, R2.5 million. By not adjusting the threshold, more and more small businesses are being forced into VAT earlier, even though they’re not genuinely “big” businesses.

b) Compliance costs are high

VAT registration means filing returns every two months, meticulous record-keeping, and stricter accounting. Many entrepreneurs don’t have in-house finance teams, so they must hire accountants, adding costs that eat into already thin margins.

c) Pricing disadvantage

Small businesses serving individual consumers can’t easily pass VAT on. If a non-VAT vendor sells a service for R1,000, the price is R1,000. If a VAT-registered competitor sells the same service, they must charge R1,150. That extra cost can drive customers to cheaper, non-VAT competitors.

d) Growth disincentive

Many businesses intentionally keep their turnover under R1 million to avoid VAT registration. This creates a “glass ceiling” where entrepreneurs turn away work or slow expansion because crossing the threshold would eat away at profits.

3. The Bigger Picture: Impact on South Africa’s Economy

When small businesses are stifled, the entire economy suffers.

Employment creation stalls: SMEs are the largest job creators. If they can’t scale past R1 million comfortably, they won’t hire more staff.

Reduced competitiveness: Higher compliance costs make local businesses less competitive compared to international players or informal businesses that don’t face the same obligations.

Tax base distortion: Instead of encouraging growth and higher tax revenue in the long term, the rigid threshold pushes businesses to stay small and under-declare.

4. International Comparisons

South Africa’s R1 million threshold seems arbitrary when compared internationally:

UK: £90,000 (±R2.1 million)

New Zealand: NZ$60,000 (±R660,000)

India: ₹4 million (±R900,000) for goods, ₹2 million (±R450,000) for services

Kenya: KSh 5 million (±R650,000)

While systems differ, many countries periodically adjust their thresholds for inflation. South Africa has not, effectively “trapping” smaller businesses in compliance requirements meant for larger enterprises.

5. What Entrepreneurs Should Do

Even though policy may be slow to change, entrepreneurs can take proactive steps:

a) Know your numbers

Track turnover closely. Don’t get caught off guard when you cross the threshold. If you’re close, start preparing.

b) Factor VAT into pricing early

Even if you’re not yet VAT registered, run your financial models as if you are. That way, when the time comes, your business model doesn’t collapse under new pricing.

c) Use VAT to your advantage

Remember, being VAT registered isn’t all bad. You can claim back VAT on business expenses like rent, equipment, and supplies. If your clients are also VAT vendors, they don’t mind you charging VAT, since they can claim it back.

d) Outsource compliance smartly

Yes, VAT admin is a burden, but modern cloud accounting tools and skilled accountants can make it manageable. Build this into your budget rather than ignoring it.

6. The Call for Policy Reform

Ultimately, though, the onus shouldn’t only fall on entrepreneurs. Policymakers need to reconsider the VAT threshold in light of inflation and the realities small businesses face. Raising the threshold to at least R2 million would:

• Reduce red tape for micro-entrepreneurs
• Encourage growth rather than penalise it
• Align the system with international norms
• Allow SARS to focus compliance resources on medium and large businesses where the real revenue lies

Conclusion

The failure to increase South Africa’s VAT threshold has quietly created a chokehold on small businesses. What was once a fair demarcation line has now become an artificial ceiling, holding back entrepreneurs from scaling and hiring.

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While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writer nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.