In the 2025 Budget Speech, Finance Minister Enoch Godongwana unveiled a proposed staggered increase to the VAT rate.
Image: AI Lab.
By Colin Timmis, Country Manager for Xero South Africa
In the 2025 Budget Speech, Finance Minister Enoch Godongwana unveiled a proposed staggered increase to the VAT rate.
This move, designed to address economic challenges and fund key government initiatives, will undoubtedly add pressure to small businesses, especially those who are already struggling with cash flow.
However, it’s worth understanding who pays VAT, how VAT contributes to total tax revenue, and how you as a small business can manage this change.
Value Added Tax (VAT) is a consumption tax levied on most goods and services in South Africa. It forms a crucial part of the nation's revenue stream, and any changes to its rate have significant implications, particularly for small businesses.
The government has proposed increasing the current 15% VAT rate to 15.5% on May 1, 2025, and then further to 16% on April 1, 2026.
This is projected to generate an additional R28 billion in the upcoming fiscal year and R14.5 billion in the following year, funding key initiatives across healthcare, social grants, and infrastructure.
To understand the significance of this increase, it's important to examine the role of VAT in the national tax revenue.
VAT contributes significantly to South Africa's total tax revenue, accounting for 25.7%, second only to Personal Income Tax.
However, while there were 959,000 registered VAT vendors in the 2023/24 tax year, only 488,118 were active.
Interestingly, 53% of these active vendors had a turnover of R1 million or less, accounting for only 5.6% of domestic VAT payments.
This gap underscores the prevalence of micro and small businesses within the VAT system and the challenges they face in compliance, even as the bulk of VAT revenue comes from larger businesses.
This data highlights the government's need to increase revenue, and the difficulties involved in collecting that revenue.
The proposed VAT increase will directly impact small businesses through increased input costs, pricing pressures, cash flow challenges, and administrative burdens.
If you’re a small business owner, you’ll need to decide whether to absorb these costs or pass them on to your consumers.
To mitigate the impact on lower-income households, the government plans to expand the basket of VAT zero-rated items. However, small businesses still need to adapt to this change.
The VAT increase will add pressure to small businesses, especially those already experiencing squeezed profit margins and lacking a large cash reserve. To manage this increase, working with an accountant and leveraging technology to realise efficiencies and better manage cash flow will be crucial.
Now is the time to look at how you can further optimise your cash flow to deal with the increased cost. Strategies like tighter inventory control and faster invoicing can make a big difference. Using an accounting software like Xero can be transformative in this regard, offering features like online invoicing to speed up the payment process, setting up recurring invoices for regular customers and automated invoice reminders to save valuable time.
Accounting software also provides a real time snapshot of your cash flow and allows you to generate reports that provide insights into your past and future cash flow. Talking this through with your accountant can help you identify potential cash flow shortages and take proactive measures to address them. You can also use the budgeting tools in your accounting software, to create and track budgets, helping you control spending and improve cash flow management.
The proposed VAT increase represents a shift in South Africa's economic landscape, particularly for its vital small business sector. While there will be challenges, embracing digital tools and working with advisors will make it easier to navigate these changes. South African small business owners are renowned for their resilience and adaptability, so no doubt will use these qualities to continue to operate and grow.
BUSINESS REPORT