The compulsory VAT registration threshold jumped from R1 million to R2.3 million on 1 April 2026. If your turnover sits between R1m and R2.3m, you suddenly have a choice you didn’t have before: stay in the VAT system, or walk away (deregister for VAT). This guide unpacks the decision properly, the way a CFO would walk you through it across the boardroom table, including the exit VAT trap that can turn a “simple” deregistration into a five or six-figure tax bill.
The 2026 VAT threshold change in a nutshell
For 17 years, the compulsory VAT registration threshold sat at R1 million. Inflation kept moving. The threshold did not. From 1 April 2026 the compulsory threshold is R2.3 million in taxable supplies over any consecutive 12-month period, and the voluntary threshold moved from R50,000 to R120,000. That is real relief for thousands of South African SMEs dragged into the VAT net by inflation rather than by genuine growth.
But here is the catch most owners miss: the higher threshold does not automatically deregister you. And deregistering is not free. Get this wrong and you can hand SARS a once-off VAT bill that wipes out two years of “compliance savings” in a single final return.
Quick reference: what changed on 1 April 2026
| Threshold | Before 1 April 2026 | From 1 April 2026 |
|---|---|---|
| Compulsory VAT registration | R1 000 000 per 12 months | R2 300 000 per 12 months |
| Voluntary VAT registration | R50 000 per 12 months | R120 000 per 12 months |
| Turnover Tax regime (separate) | R1 000 000 per year | R2 300 000 per year |
| VAT standard rate | 15% | 15% (proposed increase withdrawn) |
Important: Businesses already registered for VAT below the new R2.3 million threshold are not automatically deregistered. You must actively apply to SARS using form VAT123e and continue charging VAT and submitting VAT201 returns until SARS confirms your effective cancellation date in writing.
Should you deregister? The 5-question decision framework
Before you fill in a single form, work through these five questions. We use this same framework with our clients at ThriveCFO, and the answers almost always make the decision obvious within an hour.
1. Who are your customers?
If your customers are mostly businesses that are themselves VAT-registered, they don’t care about your 15%. They claim it back as input VAT. Deregistering doesn’t make you cheaper to them, it just makes you a more awkward supplier. If your customers are mostly consumers, schools, NPOs, small unregistered businesses, or government departments that struggle with VAT recovery, then your 15% is a real cost to them. Deregistering can effectively give you a 15% price advantage or a 15% margin boost overnight.
2. How much input VAT do you actually claim?
Pull your last four VAT201 returns and add up the input VAT claimed. If you’re claiming R150 000 or more a year, you’re getting real value from being inside the system. If you’re a service business claiming a few thousand rand on software subscriptions and rent, the system is giving you very little.
3. What’s sitting on your balance sheet?
This is the question almost everyone forgets. Look at your fixed assets register and your stock on hand. If you have R500 000 of equipment on which you claimed input VAT, your exit VAT bill is approximately R65 217 (15/115 of R500 000). Section 8(2) of the VAT Act treats deregistration as a deemed supply of all those assets to yourself. We unpack this further down because it is the single most expensive mistake business owners make.
4. Where is your turnover heading in the next 12 months?
If you’re at R1.4 million and growing 30% a year, you’ll be back over R2.3 million within two years. Deregistering, paying exit VAT, then re-registering 18 months later is an administrative nightmare that almost never pays back. Stability and trajectory matter as much as the current number.
5. What is VAT compliance actually costing you?
Be honest. For a clean service business with a decent accountant, VAT compliance might cost R2 000 to R4 000 per bi-monthly return plus a few hours of your time. For complex businesses with stock, foreign supplies or mixed-use assets, it can easily double. Multiply by six returns a year and you get an honest annual compliance cost. That is the number you weigh against everything else.
When deregistering is the right call
You’re a strong candidate to deregister if most of these apply:
- You sell mainly to consumers (B2C). Coffee shops, hair salons, small retailers, personal trainers, tutors, lifestyle service providers. Your customers pay your full price out of after-tax income.
- You’re a service business with low input costs. Consultants, copywriters, designers, coaches, small professional practices. Most of what you “buy” is your own time.
- You have very few business assets. A laptop and a desk don’t generate a meaningful exit VAT bill.
- Your turnover is comfortably below R2.3m and stable. You’re not about to grow back through the ceiling within 12 months.
- Your compliance cost is disproportionate to revenue. If VAT admin is costing you 3% to 5% of turnover, that is a meaningful drag.
For these businesses, deregistration delivers three real wins: a more competitive sticker price (or a fatter margin if you keep the price the same), less time on bi-monthly returns, and a cleaner relationship with SARS.
When staying registered is the right call
Equally, there are scenarios where you should stay exactly where you are, even if the new threshold technically lets you walk away.
- You sell mainly to other businesses (B2B). Your VAT-registered customers don’t care about your 15%, so deregistering just makes your invoicing weird.
- You claim significant input VAT. Importers, retailers with stock, manufacturers, businesses with high rent or utility costs, anything asset-heavy. That input VAT recovery is real cash.
- You’re asset-heavy. The exit VAT on your fixed assets and stock can be brutal. A small fleet of vehicles, a kitchen full of equipment, a workshop of tools, all of it gets caught by section 8(2).
- You’re trending toward R2.3m. If you’ll cross the threshold again within 24 months, the round-trip cost makes no sense.
- Your professional image relies on it. In some industries, “VAT-registered” signals scale. Tender boards and corporate procurement teams often filter on it.
Side-by-side: deregister or stay?
| Factor | Lean towards deregistering | Lean towards staying registered |
|---|---|---|
| Customer base | B2C, NPOs, unregistered SMEs | B2B, corporates, government |
| Input VAT claimed annually | Low (under R50 000) | High (R150 000+) |
| Asset and stock base | Light (laptop, desk, minimal stock) | Heavy (vehicles, equipment, inventory) |
| Turnover trajectory | Stable or declining, well below R2.3m | Growing, approaching R2.3m |
| Pricing sensitivity | Customers price-shop, 15% matters | Customers don’t notice VAT |
| Compliance burden | Disproportionate to revenue | Already streamlined and absorbed |
The VAT exit tax trap: deemed supply of business assets
This is the part of the conversation where business owners go quiet. Under section 8(2) of the Value-Added Tax Act, No. 89 of 1991, when you cease to be a VAT vendor, SARS deems you to have supplied all the goods and rights forming part of your enterprise immediately before deregistration. In plain English: SARS treats it as though you sold everything in the business to yourself on the day before you exit.
Output VAT is then payable at the tax fraction of 15/115 on the lower of:
- The original VAT-inclusive cost of the asset; or
- The open market value of the asset on the date of deregistration.
The reasoning is straightforward, even if it stings. While you were a VAT vendor, you claimed input VAT on those assets. The deemed supply mechanism effectively recovers that input tax when you leave the system. No actual sale, no cash received, but a real liability becomes payable to SARS in your final VAT201 return.
What gets caught by section 8(2)?
- Trading stock on hand on the date of deregistration
- Capital equipment: vehicles, machinery, computers, office furniture
- Tools and consumables
- Goodwill and certain rights capable of assignment, cession or surrender
- Anything else forming part of the enterprise on which input VAT was originally claimed
Assets on which input VAT was previously denied (for example, entertainment costs or motor cars that fell foul of section 17(2)) are excluded. That is a small mercy.
Worked example: the exit VAT bill nobody saw coming
Consider a small Johannesburg-based design studio with turnover of R1.8 million. The owner reads the budget speech, sees R2.3 million, and decides to deregister.
| Asset | Lower of cost / market value (incl. VAT) | Exit VAT (15/115) |
|---|---|---|
| Apple workstations and laptops | R 320 000 | R 41 739 |
| Office furniture and fittings | R 85 000 | R 11 087 |
| Vehicle (delivery bakkie) | R 240 000 | R 31 304 |
| Stock of printed merchandise | R 60 000 | R 7 826 |
| Total exit VAT due in final return | R 705 000 | R 91 956 |
R91 956 payable to SARS, out of cash flow, in the final VAT period. No actual sale. No revenue received. Yet the bill is real and it is enforceable.
The instalment lifeline: Historically, when the threshold last moved in 2009, National Treasury allowed vendors affected by the change to pay their exit VAT in six equal monthly instalments. Similar relief is widely expected this time around but, as at the time of writing, no formal regulation has been gazetted under section 8(2H). Always check the current SARS position before you commit to deregistering. Do not assume the instalment concession applies until SARS confirms it for your specific case.
Step-by-step: how to apply for deregistration under section 24 of the VAT Act
If you’ve worked the decision framework, modelled your exit VAT, and concluded that deregistering is genuinely the right call, here is the process. Section 24 of the VAT Act governs the cancellation of registration, and SARS has a defined administrative procedure.
Step 1: Get your VAT house in order
SARS will not finalise a cancellation while you have outstanding returns, unpaid VAT, or unresolved penalties. Submit every outstanding VAT201, pay every cent of VAT, penalties and interest, and clear any disputes before you file the application. Skip this and your application will simply stall.
Step 2: Calculate your projected exit VAT
Run a “mock” final VAT return. List every asset on which you claimed input VAT, value each one at the lower of cost or market value, and apply 15/115. This is the number you need to be able to pay (or fund) on your final return. If the number is uncomfortable, stop and rethink before you submit the form.
Step 3: Complete form VAT123e
The official form is the VAT123e – Application for the Cancellation of Registration of a Person in Respect of All His Enterprises, available on the SARS website. Use form VAT123T if you’re cancelling a separately registered enterprise, branch or division.
Step 4: Draft a clear motivation letter
The form requires you to state the circumstances giving rise to the cancellation. Either complete the section on the form fully or attach a short letter referencing:
- Your taxable supplies for the preceding 12 months (below R2.3 million)
- Reasonable grounds for believing the next 12 months will remain below R2.3 million
- Confirmation that you are applying for cancellation under section 24(2) of the VAT Act in light of the threshold increase effective 1 April 2026
- Supporting management accounts, financial statements and bank statements
Step 5: Submit through the right channel
You can submit via SARS eFiling, via email to your registered SARS branch, or in person by booking a virtual appointment through the SARS eBooking system. Keep proof of submission. Always.
Step 6: Keep operating as a VAT vendor until SARS confirms otherwise
This is where most owners trip up. You remain legally a VAT vendor until SARS issues a formal Notice of Cancellation specifying your effective deregistration date. Until that letter lands, you must continue to charge VAT on every taxable supply, deduct input tax where allowed, and submit your VAT201 returns. Stopping early on the assumption that “the form is in” creates a compliance mess that takes months to unwind.
Step 7: File your final VAT201 return
On your last tax period as advised by the Commissioner, declare your output tax as usual, deduct any final input tax, and crucially declare the deemed output tax on your enterprise assets in Field 1A of the VAT201. This is your exit VAT. Pay the amount due, or apply for the instalment concession if available.
Step 8: Retain your records for five years
Even after deregistration, you are required to retain all VAT records, including tax invoices and the underlying ledgers, for at least five years. Make sure your accounting software subscription, backups or archive copy of records remains accessible for that full period.
How to communicate the change to your customers
Once SARS has confirmed your effective deregistration date, your invoicing and customer communication needs to change. Two practical points.
First, on the effective date you stop issuing “Tax Invoices” and start issuing plain “Invoices”. Your VAT number must be removed from your invoice templates, your quotes, your website footers and your email signatures from that date forward. You may not charge VAT on any supply made on or after the effective deregistration date.
Second, send a short, professional note to your active customer base. Below is a sample wording you can adapt.
Subject: A small change to our invoicing from [effective date]
Dear [Customer name],
We wanted to give you a quick heads-up about a small administrative change on our side. From [effective deregistration date], [Business name] is no longer registered for VAT, following the increase in the South African compulsory VAT registration threshold to R2.3 million on 1 April 2026.
What this means for you:
• Our invoices from [effective date] will no longer include 15% VAT.
• Our prices remain the same / decrease by 15% [delete as applicable].
• Invoices will be issued as standard “Invoices” rather than “Tax Invoices”.
• Our service, contact details and account details remain unchanged.
If you have any questions about how this affects an open quote or contract, please reach out and we’ll walk you through it.
Kind regards,
[Your name]
[Business name]
Two quick tips. If your customers are predominantly B2C, lead with the price benefit. If your customers are B2B and you’ve decided to keep your price the same (effectively giving yourself a 15% margin uplift), keep the note neutral and matter-of-fact. Nobody loves a supplier announcing a quiet price increase.
Frequently asked questions
Will my VAT number be reused or reissued?
No. Once your VAT registration is cancelled, your VAT vendor number is closed. If you ever cross the threshold again and need to re-register, SARS issues a fresh VAT registration with the same VAT number reactivated in most cases, but only after a full new application and verification process.
What happens to my existing tax invoices and credit notes?
Tax invoices and credit notes issued before your effective deregistration date remain valid. Your customers can claim input VAT on them as they normally would, provided the invoices meet the section 20 requirements. Invoices dated after your effective deregistration date may not include VAT.
Can I claim input VAT on the final return?
Yes. In your final VAT201 you are still entitled to claim input VAT on legitimate business expenses incurred during that final tax period, subject to the usual section 17 rules. Don’t leave that money on the table.
What about VAT on debtors and creditors at deregistration?
There are specific adjustment rules for outstanding debtors and creditors at the date of deregistration. In broad terms, if you’ve already accounted for output VAT on a debtor that you have not yet collected, you may be entitled to a bad-debt adjustment under the right circumstances. This is technical: get a tax advisor to model it for your specific situation.
If my voluntary VAT registration is below the new R120 000 threshold, am I automatically deregistered?
No, but SARS has confirmed it will notify vendors whose taxable supplies in the preceding 12 months are below R120 000 of its intention to cancel the registration. You then have an opportunity to respond before SARS confirms the final tax period and the cancellation date.
Can I deregister for VAT and stay on Turnover Tax?
Yes. Turnover Tax and VAT are separate regimes, and the Turnover Tax threshold also moved to R2.3 million on 1 April 2026. A qualifying micro-business can use Turnover Tax for income tax while remaining on VAT, or sit outside both. Each combination has different implications: don’t choose based on the headline.
How long does the deregistration process take?
Deregistration is not instant. From application to formal Notice of Cancellation can take anywhere from a few weeks to several months, particularly where SARS triggers a verification. Plan for delays, and keep operating as a VAT vendor throughout.
Decision tree: should you deregister?
Use this as a quick gut-check before you do any modelling.
START: Is your 12-month rolling turnover below R2.3 million?
↳ No → You can’t deregister. Stay registered.
↳ Yes → Continue.
Q1: Are most of your customers VAT-registered businesses?
↳ Yes → Strong reason to stay registered.
↳ No → Continue.
Q2: Do you claim more than R150 000 a year in input VAT?
↳ Yes → Strong reason to stay registered.
↳ No → Continue.
Q3: Is your exit VAT bill on assets and stock more than 6 months of compliance savings?
↳ Yes → Stay registered or get specialist tax advice.
↳ No → Continue.
Q4: Will your turnover stay below R2.3m for the next 24 months?
↳ No → Stay registered. A round-trip is rarely worth it.
↳ Yes → Deregistration is likely the right call. Get a CFO or tax advisor to confirm and run the section 8(2) numbers.
Deregistration readiness checklist
Print this. Tick it off before you press send on VAT123e.
| ✓ | Task |
|---|---|
| Confirmed 12-month rolling turnover is below R2.3 million | |
| Confirmed reasonable grounds that next 12 months will stay below R2.3 million | |
| Pulled and reviewed last 4 VAT201 returns for input VAT trend | |
| Listed all fixed assets and stock; valued each at lower of cost or market value | |
| Calculated projected exit VAT (15/115 on the total) | |
| Confirmed cash flow can absorb exit VAT (or instalment plan secured) | |
| All outstanding VAT returns submitted | |
| All VAT, penalties and interest paid in full | |
| VAT123e form completed and reviewed | |
| Motivation letter and supporting documents prepared | |
| Application submitted via eFiling or email to SARS branch | |
| Proof of submission saved | |
| VAT invoicing templates and email signatures ready to update on effective date | |
| Customer communication drafted and approved | |
| Records retention plan in place for the 5-year period | |
| Plan in place to keep charging VAT and filing VAT201 until Notice of Cancellation received |
The bottom line
The 2026 VAT threshold increase is a genuine win for South African SMEs. It is the first meaningful adjustment in 17 years and it does exactly what good tax policy should do: take genuinely small businesses out of a compliance burden that wasn’t designed for them.
But the higher threshold gives you a choice, not an instruction. The right answer depends on your customers, your input VAT, your asset base, your growth trajectory and your appetite for one more bi-monthly return. For a B2C service business with a laptop and a desk, deregistration is often a no-brainer. For a B2B business with stock, equipment and corporate clients, staying registered is almost always the right call.
Whatever you do, do not treat deregistration as an administrative formality. Section 8(2) is real. Exit VAT is real. The cash flow shock at the end of your final VAT period is very real. Run the numbers, get advice, and make the call with your eyes open.
Not sure which call to make? At ThriveCFO we run a one-hour VAT Position Review for SMEs sitting between R1m and R2.3m: we pull your last four VAT201s, model your exit VAT, stress-test the decision against your growth plan, and tell you in plain English whether to stay or go. Get in touch and we’ll set it up.
Disclaimer: This article is general guidance based on the VAT Act and SARS guidance as at the date of writing. It is not tax advice. Your specific facts can change the answer materially. Always engage a qualified tax practitioner before submitting form VAT123e or deregistering for VAT.
