National Treasury will proceed with a proposed amendment to the VAT Act that will compel schools to deregister as VAT vendors and pay an exit charge.
Although the amendment will still come into effect on 1 January 2026, the exit VAT liability – the deemed output tax on retained assets where input tax was previously claimed – will now be deferred to 1 January 2027. This deferral is intended to address the concern that schools have not had sufficient time to budget for the liability in the current financial year, Treasury told the National Assembly’s Standing Committee on Finance on 4 November.
The liability can be paid either in 12 monthly instalments or over another period agreed to with the South African Revenue Service.
Treasury officials briefed the committee on the department’s responses to comments received on the draft Bills and regulations that give effect to the tax proposals announced in the 2025 Budget.
Stakeholders raised concerns about the impact of the amendment on welfare activities conducted by some schools. Treasury accepted this comment and said the amendment will be reworded so that welfare activities are excluded. Schools must apply to SARS to benefit from the exclusion.
The draft TLAB proposes expanding the VAT exemptions to cover all goods and services supplied by basic educational institutions, particularly schools. The exemption will force schools currently registered as VAT vendors to deregister, ending their ability to claim input VAT.
Section 12(h)(i) of the VAT Act exempts the supply of educational services by institutions such as schools registered under the South African Schools Act. Further, section 12(h)(ii) extends the exemption to goods or services supplied by these institutions “solely or mainly for the benefit of its learners or students”, provided they are “necessary for and subordinate and incidental” to the core educational services, and supplied for consideration in the form of school fees, tuition fees, or payments, for lodging and boarding.
However, the wording of section 12(h)(ii) implies that if goods or services are supplied by a school and the consideration for that supply is not in the form of school fees, then the supply should be a taxable supply, and the school should charge VAT at the standard rate.
Consequently, many schools involved in commercial activities – such as selling school uniforms or renting facilities such as astro turf, activity centres, gyms, or halls to private individuals or clubs – have registered as VAT vendors. This registration allows them to deduct input tax on related acquisitions.
The proposed amendment will make all goods and services supplied by schools VAT-exempt, closing the gap that allowed schools to register and claim VAT on other activities.
Once schools are forced to deregister as VAT vendors, the VAT Act treats this as if they sold their assets immediately before deregistration, triggering a “deemed supply” tax bill.
Read: VAT-registered schools may face cashflow shock
Commentators said the amendment will increase costs for schools and parents, making school fees more expensive. According to Treasury, this is a misconception.
It provided an example of a school that builds an aquatic centre at a cost of R30 million, so the VAT is R4.5m. Treasury said that based on what SARS has seen from schools’ VAT returns, the average apportionment ratio is about 2%. The school’s exit liability would be about R90 000, payable in instalments from 1 January 2027.
Treasury said SARS has observed that some schools have not applied the proper apportionment method. The default method in the VAT Act is the turnover-based method. One must apply to SARS for a ruling to use an alternative method.
Using incorrect apportionment methods has resulted in schools claiming 20% or even 80% to 90%, potentially leading to higher liabilities if audited.
However, “to protect the schools”, a new section 40E will be inserted into the VAT Act so that assessments finalised before 1 January 2026 cannot be re-opened by SARS or the vendor.
To mitigate penalties and interest, a new section 9(14) will adjust the time of supply to when each instalment is due.
Democratic Alliance MP Dr Mark Burke questioned the data behind the average 2% apportionment ratio and sought clarity on whether the protective measures implied a threat of audits.
Treasury responded that it does not have access to individuals’ tax affairs because this is confidential but relies on aggregated SARS statistics. It said audits are always possible, and the amendment provides for protection rather than a threat.
