By Leonard Willemse, Director, AJM
The Origins of the R1 Million Threshold
South Africa’s VAT registration threshold has been set at R1 million 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 micro-enterprises, the R1 million threshold was designed to reduce tax compliance burdens and encourage entrepreneurship.
Why Set The Bar at R1 Million?
The R1 million 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 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 R1 million
Since then, it has remained unchanged for over 16 years.
How South Africa Compares Globally
VAT (or GST) thresholds globally vary by country, reflecting local economic scales and policy choices:
- No threshold: Countries like Chile, Mexico, Spain, and Turkey require all businesses to register for VAT.
- Moderate thresholds:
- Germany: €22,000 (≈ R440k)
- Kenya: KES 5 million (≈ R650k)
- Canada: C$30,000 (≈ R420k)
- Australia: A$75,000 (≈ R900k)
- South Africa: R1 million (≈ $55,000), aligns with OECD averages.
- High thresholds:
- UK: £90,000 (≈ R2 million), Europe’s highest
- France, Japan, Italy, Poland: Thresholds ≈ R1.6 million+
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 micro-enterprises 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
When introduced in 2009, the R1 million threshold was generous. But inflation has eroded its real value. If adjusted for inflation, the threshold would be around R2 million today.
Key Consequences:
More Small Businesses Pulled In:
- A business earning R1 million 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 R1 million 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 (e.g., 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 R1 million 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 R1 million cutoff.
Why The Threshold Hasn’t Budged Since 2009
Despite inflation and calls from stakeholders, the R1 million threshold has remained static. Several factors may explain this:
- 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.
- 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.
- 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 R2 million
- 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 South Africa’s VAT Threshold
The R1 million VAT threshold, once progressive, is now outdated. Inflation has eroded its value, forcing micro-enterprises into a tax system designed for larger entities. This has led to compliance burdens, growth disincentives, and market distortions.
International comparisons indicate that South Africa’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 South Africa seeks inclusive growth and fiscal sustainability, aligning VAT policy with economic realities is long overdue.