The Budget tabled by Finance Minister Enoch Godongwana on 12 March saw the two-percentage-point VAT increase proposed in February replaced by two consecutive increases of half-a-percentage point, which will bring the VAT rate to 16% in the 2026/27 financial year. The first increase will be effective from 1 May.
A number of important issues need to be considered to ensure a seamless transition.
In the 2018/19 Budget, when VAT was increased by one percentage point, there was an expectation that the necessary parliamentary and legislative procedures would proceed as usual to adopt the proposed increase at the time. The 2025/26 Budget is an entirely different case, with it not a foregone conclusion that the staggered VAT increase will make it through the legislative process unscathed.
Why the government has opted for a staggered increase is up for debate. Beyond the clear need to raise revenue, it may be to ensure that consumer behaviour is not too adversely affected by the increase in VAT, with half-a-percentage point making less of an impact financially on consumers, versus one percentage point. It could also be a negotiating position given the political resistance any increase in VAT is likely to face, with a single half-a-percentage-point increase possibly where all parties may land in exchange for concessions. Furthermore, National Treasury has again leveraged bracket creep as it did in the 2024 Budget to enhance revenue collection, a decision unlikely to endear the minister to the public anytime soon.
As the legislative process unfolds, it is prudent to consider how the proposed increases in VAT will affect the day-to-day fiscal operations of all enterprises that have to account for VAT on their supplies of products and services.
Which supplies will be subject to the increased rate?
Although it is not clear how the implementation of the increased rate will be formulated, one can safely assume that the increase in the VAT rate will take effect in respect of all supplies of goods or services made by a vendor on or after 1 May 2025.
General and specific time-of-supply rules govern when a supply of goods or services is deemed to take place (section 9 of the Value-Added Tax Act). Generally, supplies of goods or services are deemed to take place at the earlier of the date upon which an “invoice” is issued and any payment is received by the vendor. (An “invoice” is any document notifying an obligation to make payment – not necessarily a prescribed “tax invoice”.)
It follows that to trigger a liability for tax at the “old” rate of 15%, the vendor must actually have “issued” the invoice or received payment.
In a VAT case in the United Kingdom dealing with a change in the rate, the court found that although the vendors (car dealers) had printed the relevant invoices (reflecting the “old” lower rate of VAT), the invoices had not been “issued” to the purchasers of the vehicles because they were placed in a drawer and not provided to the buyers. (The car dealers sought to trigger a liability for VAT at the old rate notwithstanding that the cars were only on order.)
Where an invoice is issued or any payment is made in relation to a supply made before 1 May 2025, the relevant supply will be deemed to have been made at that time, and VAT at 15% will apply.
Specific time-of-supply rules
Specific time-of-supply rules apply, inter alia, to supplies between connected persons (such as a group of companies), credit agreements subject to the National Credit Act, rental agreements, construction-related supplies of goods or services, the progressive or periodic supply of goods, instalment credit agreements, fringe benefits, and leasehold improvements. All these special time of supply rules must be considered in conjunction with the special rules that apply when VAT is increased (or decreased). These are dealt with below.
Section 67A of the VAT Act in essence provides that in these circumstances, the “old” rate of 15% will continue to apply to the goods provided, or services performed, before 1 May 2025, notwithstanding that the supplies are, in terms of section 9, deemed to take place after 1 May 2025.
Section 67A requires a “fair and reasonable apportionment” of the consideration for the supply that straddles the increase date. This rule applies specifically to rental agreements, periodic or progressive supplies, and construction-related supplies of goods and services.
Section 67A further provides specific rules in relation to the sale of fixed property or the construction of any new dwelling.
Where the price in respect of the fixed property, dwelling, or construction in question was determined or stated in a written agreement concluded before the date on which the VAT rate was increased, and the supply thereof is deemed in terms of section 9 to take place on or after the date upon which the VAT rate was increased, the VAT rate to be applied to such supplies is the “rate at which tax would have been levied had the supply taken place on the date the agreement was concluded” (that is, 15%).
Section 67A also provides that in the case of a lay-by agreement, any deposit paid before the VAT rate was increased that is applied as consideration for a supply of goods or services made after the VAT rate was increased, must be taxed at the rate that applied at “the time the agreement was concluded” (that is, 15%).
Existing agreements/pricing arrangements
The VAT for which a vendor is required to account on its supplies (output tax) is recoverable from the recipients of those supplies only if there is a contractual right to recover such VAT. There is no general legislative right of recovery, except where there is a change in the rate of VAT, or in cases of fraud or misrepresentation by the recipient.
However, section 67 of the VAT Act provides that where the rate of VAT is increased (or decreased) in respect of a supply of goods or services in relation to which “any agreement is entered into by the acceptance of an offer made before the tax was increased”, the vendor may recover such additional tax “as an addition to the amount payable by the recipient to the vendor”.
The vendor may not rely on the provisions of section 67 if there is a written agreement to the contrary – that is, the written agreement specifically provides that the vendor may not recover any increase in the VAT rate. It follows that if the agreement is silent about any increase or decrease in the VAT rate, the vendor may statutorily recover the additional VAT now payable by the vendor.
Bad debts
A vendor can claim VAT relief where a debt relating to a taxable supply in respect of which the vendor has accounted for output tax is treated as “irrecoverable”.
The vendor may have accounted for VAT at 15% in respect of a supply that was made before 1 May 2025, but the consideration for the supply is now regarded as “irrecoverable”. What rate of tax should be applied?
In terms of section 22(1) of the VAT Act, the vendor may only claim relief based on the VAT rate that applied to that particular supply (that is, 15%).
Taxpayers will need to ensure they can identify the rate of tax that must be applied in determining the relief available under section 22, where an amount of consideration is treated as “irrecoverable”.
Zero-rated list expands
As part of the government’s measures to cushion low-income households from the worst effects of the VAT increase, more items have been added to the zero-rated list. Joining the 21 existing zero-rated foodstuffs is edible offal of sheep, goat, poultry, swine, and bovine animals; certain cuts of meat such as heads, bones, feet, and tongues; dairy liquid blend; and tinned or canned vegetables.
National Treasury acknowledges that when the zero-rated basket was expanded in 2018, the benefit did not seem to fully reach lower-income households, with zero-rated items being a blunt approach to reducing the impact of tax increases on vulnerable citizens.
As a result of expanding the zero-items basket, the government is forgoing R2 billion in revenue, in addition to the estimated R23bn in VAT revenue that is foregone in relation to the existing zero-rated items.
However, low-income earners benefit from only a small proportion of the tax revenue forfeited on zero-rated items.
This article was written by Professor Des Kruger, who is consultant to Webber Wentzel, and Chetan Vanmali, who is a partner at the law firm.
Disclaimer: The views expressed in this article are those of the writers 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.
