Why SARS Should Raise the VAT Threshold for Small Businesses in South Africa

Why Raising the VAT Threshold to R3 Million Could Revolutionise Small Businesses in South Africa

 Why SARS Should Raise the VAT Threshold for Small Businesses in South Africa

As a seasoned accountant and someone deeply passionate about supporting small businesses, sole traders, self-employed individuals, and side hustlers, I’ve seen firsthand how tax compliance can either make or break a business. Today, I want to delve into an issue I believe is crucial to the growth and sustainability of small businesses in South Africa: the need for SARS to increase the VAT registration threshold from R1 million to R3 million.

This is not just a random figure I’ve pulled out of thin air. It’s a suggestion rooted in the realities that small businesses face daily—realities that I’ve witnessed in my work. I’m writing this because I want to help you understand the stakes involved and how this change could transform the South African entrepreneurial landscape.

Understanding the VAT Threshold

Currently, South African businesses are required to register for VAT if their annual turnover exceeds R1 million. While this might seem like a fair figure on the surface, it’s important to recognize the unique challenges faced by small businesses, freelancers, and side hustlers.

For many of these individuals and businesses, reaching R1 million in turnover doesn’t mean they’re swimming in profits. In fact, most of their revenue goes toward covering operational expenses, reinvesting in growth, and simply staying afloat. Adding the burden of VAT compliance at this threshold can stifle growth and innovation.

Why the R1 Million Threshold Is Too Low

Let’s break this down further:

1. High Compliance Costs for Small Businesses

Managing VAT isn’t just about filing returns. It involves meticulous record-keeping, monthly or bi-monthly submissions, and navigating penalties for late submissions or errors. For a small business owner, this often means either hiring a bookkeeper or accountant—which they may not afford—or trying to handle it themselves, which is risky and time-consuming.

Imagine someone running a small bakery or a restaurant. Their revenue might hit R1 million, but after expenses, their actual profit could be a fraction of that. Yet, they’re still expected to comply with the same VAT regulations as larger businesses with dedicated finance teams.

2. Discourages Growth and Expansion

When a small business nears the R1 million threshold, many owners hesitate to expand further. They fear the added administrative burden and costs of VAT compliance, which could outweigh the benefits of growing their revenue.

This creates a “glass ceiling” effect, where businesses intentionally cap their growth to avoid crossing the threshold. And who can blame them? Why take on additional costs and stress when the returns don’t justify it?

3. Inflation and Economic Realities

The R1 million threshold was set years ago and doesn’t reflect the current economic landscape. Inflation has steadily eroded the value of money, meaning that R1 million today doesn’t hold the same purchasing power as it did when the threshold was first established.

Raising the threshold to R3 million would align with the realities of today’s economy, giving small businesses a better chance to grow and thrive.

How a Higher Threshold Could Benefit South African Businesses

1. Encourage Small Business Growth

By raising the VAT threshold to R3 million, SARS would be giving small businesses more breathing room. Without the immediate pressure of VAT compliance, entrepreneurs could focus on reinvesting in their businesses, hiring staff, and expanding their operations.

This would not only benefit the businesses themselves but also contribute to job creation and economic growth—something South Africa desperately needs.

2. Reduce Administrative Burden

For businesses under the R3 million mark, the administrative relief would be immense. Owners wouldn’t have to navigate the complexities of VAT compliance, freeing up their time and resources to focus on what really matters: running and growing their businesses.

3. Improve Voluntary Compliance

When businesses feel that tax policies are fair and reasonable, they’re more likely to comply voluntarily. A higher VAT threshold would signal that SARS understands and supports the unique challenges of small businesses, fostering goodwill and improving overall compliance rates.

Practical Examples of the Impact

Let’s consider two examples:

• A Freelance Graphic Designer:
  A freelance graphic designer earns R1.2 million in annual turnover but spends a significant portion on software subscriptions, marketing, and subcontractors. With VAT registration, they’d need to charge clients more to account for the additional tax burden, potentially losing clients to competitors who don’t charge VAT.
  
  

• A Local Café Owner:
  A café with a turnover of R1.5 million might barely break even after rent, salaries, and supply costs. Adding VAT compliance costs and the 15% tax on sales would erode already thin profit margins, making it even harder to survive in a competitive industry.
  
  

If the threshold were raised to R3 million, both these entrepreneurs could continue to grow without the immediate stress of VAT compliance holding them back.

Addressing Counterarguments

Some might argue that raising the VAT threshold could lead to revenue losses for SARS. However, I’d argue that the long-term benefits far outweigh the short-term revenue hit. By supporting small businesses and enabling them to grow, SARS would ultimately expand its tax base.

Additionally, businesses that grow beyond the R3 million threshold would be better equipped to handle VAT compliance, resulting in fewer errors and higher-quality submissions.

Why Small Businesses Need Professional Support

It’s worth mentioning that whether or not the VAT threshold is raised, tax compliance is not something small businesses should DIY. Trust me when I say this: the risks are too high. SARS business tax, VAT, PAYE, UIF, and other compliance matters require expertise.

As an accountant who has worked with countless small businesses, I’ve seen the consequences of trying to go it alone. Incorrect submissions, missed deadlines, and non-compliance can result in hefty penalties that could cripple a business.

If you’re running a small business, side hustle, or sole proprietorship, please consider working with a bookkeeper or accountant. It’s an investment in the long-term health of your business.

My Final Thoughts

Raising the VAT threshold from R1 million to R3 million isn’t just about numbers. It’s about creating an environment where small businesses can thrive, innovate, and contribute to the economy without being bogged down by unnecessary administrative burdens.

To SARS, I urge you to consider this change. Let’s give our small businesses the breathing room they need to grow and succeed. And to every entrepreneur reading this, know that you’re not alone. There are professionals who understand your challenges and are here to help.

Together, we can build a thriving small business ecosystem in South Africa—one that benefits everyone.