PODCAST | SA’s VAT threshold: why R1m no longer adds up

When introduced in 2009, the R1m VAT threshold was generous. But inflation has eroded its real value. In this edition of Business Law Focus, host Evan Pickworth speaks to tax expert from AJM, Leonard Willemse, about why the threshold should change and what the ideal level could be.

The Context

SA’s VAT registration threshold has been set at R1m since 2009. This was a significant leap from the previous R300,000 limit, part of a broader reform aimed at supporting small businesses. Introduced alongside a simplified “turnover tax” for microenterprises, the R1m threshold was designed to reduce tax compliance burdens and encourage entrepreneurship.

The R1m figure was intended to define “very small businesses” and shield them from the administrative and financial costs of VAT compliance. The aim was to support micro-entrepreneurs and reduce the SA Revenue Service’s (SARS’s) workload by excluding low-revenue firms from the VAT system.

How the VAT Threshold has shifted over time

1991 (VAT introduced): R150,000
Later adjusted: R300,000
2009: Raised to R1m

Since then, it has remained unchanged for more than 16 years.

How SA compares globally

VAT (or GST) thresholds globally vary by country, reflecting local economic scales and policy choices:

No threshold: Countries such as Chile, Mexico, Spain and Turkey require all businesses to register for VAT.
Moderate thresholds:
Germany: €22,000 (≈ R440,000)
Kenya: KES 5-million (≈ R650,000)
Canada: C$30,000 (≈ R420,000)
Australia: A$75,000 (≈ R900,000)
SA: R1m (≈ $55,000), aligns with OECD (Organisation for Economic Co-operation and Development) averages.
High thresholds:
UK: £90,000 (≈ R2m), Europe’s highest
France, Japan, Italy, Poland: thresholds ≈ R1.6m+

Countries generally set VAT thresholds according to the size and structure of their economies. The EU ranges from €12,500 to €50,000; the UK stands out with its much higher level.

The balancing act: Why VAT thresholds matter

Administrative Efficiency

Small businesses often face disproportionate compliance costs — invoicing, VAT returns and record-keeping. A threshold spares microenterprises from this burden.

Avoiding Economic Distortions:

A too-high threshold can unfairly benefit smaller firms over larger ones.
A too-low threshold can discourage growth, as firms may intentionally stay small to avoid VAT obligations.

The hidden costs of a frozen threshold

If adjusted for inflation, the threshold would be around R2m today.

Key consequences:

More small businesses pulled in:

A business earning R1m in 2009 was larger than one earning the same today.
Many freelancers, consultants and sole traders now easily cross the threshold.

Heavy compliance burden:

Businesses that exceed R1m in turnover must file VAT returns every two months.
They also require accurate bookkeeping, often hiring outside help at an additional cost.
Errors can lead to penalties, further straining small firms.

Cash flow pressure:

VAT is payable when the invoice is issued, not when payment is received.
Many small businesses struggle with delayed payments, but must still remit VAT upfront.

Limited input VAT deductions:

Service-based businesses (for example, consultants, professionals) incur minimal VAT on expenses.
This results in a high net VAT payment, effectively acting as a 15% tax on their output.

Growth disincentive:

A “cliff effect” emerges around the R1m mark.
Businesses may limit turnover to avoid VAT registration.
Anecdotal evidence shows “bunching” just below the threshold, distorting business behaviour.

Distorted competition:

A non-VAT-registered firm can offer lower prices (no VAT added).
Competitors just over the threshold must charge 15% VAT.
This creates an uneven playing field around the R1m cut-off.

Why the threshold hasn’t budged since 2009

Despite inflation and calls from stakeholders, the R1m threshold has remained static. Several factors may explain this:

1. Revenue considerations:

A lower threshold brings more businesses into the VAT net.
Many small service firms sell directly to consumers (who can’t claim VAT), boosting government revenue.

2. Political and fiscal priorities:

VAT rate changes and income tax adjustments often take precedence.
Increasing the threshold could be seen as tax relief for business owners — not a current policy focus.
In fact, recent proposals to raise VAT rates (in two phases) suggest revenue expansion is the current priority, not easing burdens.

3. Administrative strategy:

A lower threshold means more VAT vendors, increasing SARS’s oversight workload.
However, more registered vendors also discourage informal trading.
Sars may see this trade-off as worthwhile, even if it strains monitoring resources.

Charting a way forward

There is growing pressure from tax experts and business organisations to revise the threshold:

Proposed adjustments:

Double the threshold to R2m
Raise the voluntary registration minimum from R50,000 to R100,000

These changes would:

Relieve thousands of small firms from VAT obligations
Lower compliance costs
Encourage business growth and formalisation
Reduce SARS’s administrative burden from low-yield vendors

The case for updating SA’s VAT threshold

The R1m VAT threshold, once progressive, is now outdated. Inflation has eroded its value, forcing microenterprises into a tax system designed for larger entities. This has led to compliance burdens, growth disincentives, and market distortions.

International comparisons indicate that SA’s threshold is moderate, but without adjusting for inflation, it is becoming an increasingly significant barrier to small business development. Revisiting the threshold could offer meaningful relief to entrepreneurs while simplifying tax administration for Sars.

As SA seeks inclusive growth and fiscal sustainability, aligning VAT policy with economic realities is long overdue.