The decision to deregister from value-added tax is far more than an administrative formality – it has immediate tax consequences.
When a business cancels its VAT registration, it must account for VAT on the lower of the cost or the open market value of its assets during that tax period. This deemed output tax, often referred to as the “exit charge”, can create significant cash flow pressure.
Small businesses welcomed the 2026 Budget announcement that the mandatory VAT registration threshold will rise from R1 million to R2.3m effective 1 April. Many businesses below the new threshold are considering deregistration. However, some may find it financially unfeasible once the exit charge is factored in, explains Severus Smuts, the director of indirect tax at Deloitte.
The VAT Act requires vendors to treat assets – on which input VAT was previously claimed –as if they were sold. This includes property, equipment, computers, and vehicles. As Smuts notes, small businesses and sole proprietors face the same challenge as schools that have been compelled to deregister.
Upon deregistration, the school and vendor must account for output tax in respect of the deemed disposal of all enterprise assets prior to deregistration.
Varusha Moodaley, senior associate at Cliffe Dekker Hofmeyr, says Finance Minister Enoch Godongwana can issue regulations prescribing the tax period in which the deemed output tax must be paid.
To date, no such regulations have been issued. When the threshold was increased 17 years ago, vendors who opted out of the VAT net were given six months to pay the deemed output tax.
Moodaley expects similar measures will be introduced in due course. Smuts also expects a repayment period similar to what was announced for schools. It may not be 12 months, but there will be some grace period. “I think it will only be fair.”
The process
VAT vendors must apply to the South African Revenue Service to deregister. They cannot simply stop charging VAT, Smuts says.
“Until SARS gives the go-ahead, the business must continue to charge and account for VAT. With the last VAT return, the exit charge (deemed output VAT) must be paid.”
The vendor must clearly state the circumstances under which the business wants to cancel registration, either in the prescribed form or in a separate letter, adds Moodaley. SARS will respond with an acknowledgment letter and will advise on the vendor’s final tax periods.
Small businesses that have claimed very little or no VAT on capital assets may find it easier to deregister, because the exit charge may be smaller than it is on businesses that have claimed on properties and expensive equipment and vehicles, says Smuts.
Although businesses must disclose the input tax on capital items separately in the VAT return, very few vendors do so. It is thrown in with all the other deductions. If the business did not keep proper records, it will be difficult to prove that it did not claim VAT.
The business will most probably have to compile a balance sheet with all assets on hand. SARS will conduct an audit to determine whether the exit charge has been calculated correctly.
“I think SARS will simply assume that VAT was claimed on all the assets. The burden of proof is on the taxpayer to demonstrate on which assets they claimed VAT and on which they did not,” says Smuts.
Compliance costs
Registering a vendor comes with compliance requirements that can be administratively burdensome, time-consuming, and costly for small or start-up businesses that do not have sufficient administration resources, says Moodaley.
Businesses may incur costs associated with acquiring the services of an accountant and implementing accounting systems to ensure accurate VAT reporting.
“If the cost and administrative burden associated with VAT registration is weighed against the monetary benefit obtained from claiming input tax deductions upon registration, a business may decide that it is more beneficial to cancel its VAT registration,” she says.
Smuts agrees and says this is particularly true for businesses providing personal services to individuals such as medical practitioners, or plumbers, electricians, and independent contractors.
One of the biggest advantages for a small business when they deregister is that they can reduce their products or services by 15%. This will increase their competitiveness. They can also keep their prices at the same level and increase their profitability.
Small VAT-registered businesses that only engage in business-to-business trade with other VAT vendors will probably remain in the VAT net even if their taxable supplies are less than R2.3m, adds Smuts.
Both Smuts and Moodaley warn that vendors should carefully consider deregistration, in particular the immediate cost implication from any deemed output tax liability.
“Ultimately, whether deregistration is beneficial will depend on the particular circumstances of each enterprise, including its pricing structure, client base, and input tax position,” says Moodaley.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional tax advice.
