At first glance, deregistering may seem like the logical next step.
However, what appears to be a simple compliance decision can quickly become a costly tax event.
Hidden within the VAT Act is a provision that can trigger a once-off VAT liability at the very moment a business exits the VAT system.
Many vendors only become aware of this rule after they have already taken steps to deregister.
The little-known rule that can trigger a VAT bill overnight
Deregistering for VAT does not merely bring an end to the obligation to submit VAT returns.
When a vendor ceases to be registered for VAT, section 8(2) of the Value-Added Tax Act, No. 89 of 1991 (VAT Act) deems certain goods and rights forming part of the assets of the enterprise to have been supplied immediately before deregistration.
In practical terms, this means that the vendor may be required to account for output VAT at the standard rate of 15% on the value of those assets, even though no actual sale has taken place and no cash has been received.
Where input VAT was previously claimed on these assets, the VAT system effectively recovers that input tax through the deemed supply mechanism at the point of deregistration.
For many businesses, this is the stage where what appeared to be a straightforward administrative decision unexpectedly results in a VAT liability becoming payable to the South African Revenue Service (SARS).
Why many businesses are caught off guard
Over time, most businesses accumulate goods and rights forming part of the assets of the enterprise on which they claimed input VAT. These may include:
- Trading stock
- Machinery and equipment
- Intellectual property or contractual rights
- Other operational assets used in the business
When a vendor deregisters while these assets remain in the enterprise, the deemed supply rule in section 8(2) may apply to their value.
Because many of these assets were not acquired for immediate resale, vendors may not anticipate that they may effectively be treated as taxable supplies at the point of deregistration.
As a result, a business may only discover the VAT implications when calculating the final VAT position upon exit from the VAT system.
For businesses with significant historical input VAT claims, the amount involved can be substantial.
The threshold increase does not remove the tax risk
The increase in the compulsory VAT registration threshold announced in the 2026 National Budget, was introduced to reduce the compliance burden for smaller enterprises. However, the change in the threshold does not override the operation of the deeming provisions contained in the VAT Act.
In other words, while a business may now qualify to deregister because its turnover falls below the new threshold of R2.3 million, the VAT consequences of leaving the system remain unchanged.
At the same time, SARS continues to strengthen its data-driven compliance capabilities. Vendor registrations, deregistrations and filing histories are increasingly visible to the revenue authority.
What may appear to a vendor as a simple administrative step could prompt closer scrutiny of the vendor’s VAT position upon exit, particularly where enterprise assets remain in the business.
A point that may warrant policy consideration
The increase in the threshold also raises an important policy question regarding its interaction with the deemed supply provisions in section 8(2).
Historically, when the VAT registration threshold has been increased, National Treasury has considered the interaction between the threshold and the deemed supply provisions. It remains to be seen whether similar clarification or relief may be contemplated in the current context.
Until such clarity emerges, vendors considering deregistration should proceed carefully and ensure that the potential VAT consequences of section 8(2) are fully understood before exiting the VAT system.
Deregistration is a tax event, not an administrative formality
Many businesses approach VAT deregistration as a compliance simplification exercise. In reality, it is a tax event that may carry immediate financial consequences.
Before taking steps to deregister, vendors should carefully consider:
- The goods and rights currently forming part of the assets of the enterprise
- Whether input VAT was previously claimed on those assets
- The potential output VAT that could arise under the deemed supply rules
- Potential exclusions contained in the provisos to section 8(2)
Failing to evaluate these factors may result in an unexpected VAT liability arising at the precise moment the business believes it is simplifying its tax affairs.
The bottom line
The increase in the VAT registration threshold to R2.3 million may create opportunities for some businesses to exit the VAT system but deregistration is not always a simple administrative step.
Where enterprise assets remain in the business, the deemed supply rules may trigger a once-off VAT liability, even though no assets have been sold and no cash has been received.
Until the position is clarified, vendors should approach VAT deregistration with caution. Stepping out of the VAT system may prove far more expensive than remaining in it.
