The 2025 Budget tabled by Finance Minister, Enoch Godongwana in Parliament on Wednesday, 12 March 2025, saw the 2% VAT increase initially proposed in February 2025 replaced by two consecutive 0,5% increases, bringing the VAT rate to 16% in the 2026/27 financial year. The first 0.5% will be effective from 1 May 2025.
However, a number of important issues need to be considered to ensure a seamless transition, write Professor Des Kruger, consultant, and Chetan Vanmali, partner at Webber Wentzel.
In the 2018/2019 Budget, when VAT was increased by 1%, there was an expectation that the necessary Parliamentary and legislative procedures would proceed as usual to adopt the proposed increase at the time. The 2025/2026 Budget is an entirely different case, with it not a foregone conclusion that the staggered 1% 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 consumer behaviour is not too adversely affected by the increase in VAT, with 0,5% making less of an impact financially on consumers, versus 1%.
It could also be a negotiating position given the political resistance any increase in VAT is likely to face, with a single 0,5% increase possibly where all parties may land in exchange for concessions.
Furthermore, the 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?
While 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 – VAT Act). Generally, supplies of goods or services are deemed to take place at the earlier of the date upon which an “invoice” (any document notifying an obligation to make payment – not necessarily a prescribed “tax invoice”) is issued and any payment is received by the vendor.
It follows that to trigger a liability for tax at the “old” 15% rate, the vendor must actually have “issued” the invoice or received payment.
In a UK VAT case dealing with a change of rate, the court found that while the vendors (car dealers) had printed the relevant invoices (reflecting the “old” lower rate of VAT), such invoices had not been “issued” to the purchases of the vehicles as they had been placed in a drawer and not actually provided to the purchasers (car dealers had sought to trigger a liability for VAT at the old rate notwithstanding that the car were still only on order).
By contrast, 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 apply to, inter alia, 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, prior to 1 May 2025, notwithstanding that those 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 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” (15%).
Finally, 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” (ie 15%).
Existing agreements/pricing arrangements
The VAT that a vendor is required to account for on its supplies (output tax) is only recoverable from the recipients of those supplies 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 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, however, 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 as regards 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 is able to 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 (15%).
Taxpayers will need to ensure they are able to 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 a 2025/2026 VAT increase, more items have been added to the zero-rated list. Joining 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.
The Treasury acknowledges that the last time 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, government is forgoing R2-billion in revenue, in addition to the estimated R23-billion VAT revenue that is foregone in relation to the existing zero-rated items.
However, low-income earners only benefit from a small proportion of tax revenue forfeited on zero-rated items, and low-income earners also purchase standard zero-rated items, exposing them to a higher VAT rate.