VAT rate increase: Key considerations for businesses ahead of May 2025

The implementation of the 0.5% value-added tax (VAT) in May 2025 is set to come with new changes that businesses would need to be aware of.

Finance Minister Enoch Godongwana announced a VAT increase during the March tabling of the 2025 Budget Speech, with another 0.5% set to be implemented in 2026.

Professor Des Kruger, consultant at Webber Wentzel, said that when VAT was increased by 1% in the 2018/2019 budget, the necessary parliamentary and legislative procedures were expected to proceed as usual in adopting the proposed increase.

However, this is not the case with this implementation, as it is not a foregone conclusion that the staggered 1% VAT increase will make it through the legislative process unscathed. 

ALSO READ: Budget speech: VAT increases by 0.5%, with another 0.5% hike next year

Which supplies will be subject to the increased rate?

Kruger added that it is not clear how the implementation of the increased rate will be formulated.

However, one can safely assume that the increase in the VAT rate will apply to all supplies of goods or services made by a vendor on or after 1 May 2025.

The general and specific time of supply rules govern when a supply of goods or services is deemed to occur (section 9 of the VAT Act).

“Generally, supplies of goods or services are deemed to take place at the earlier date upon which an “invoice” (any document notifying an obligation to make payment – not necessarily a prescribed “tax invoice”) is issued, and the vendor receives any payment.

“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.”

How the specific time of supply rules apply

He added that 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).  

ALSO READ: Budget 2025: Here is how VAT increase could hurt cross-border trade

Goods and services provided before 1 May

“Section 67A of the VAT Act essentially 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 deemed to have taken place after 1 May 2025 in terms of section 9.

“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.”

VAT and property

He added that section 67A provides specific rules regarding the sale of fixed property or the construction of new dwellings.

“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’ (i.e., 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 applied at “the time the agreement was concluded” (i.e., 15%).

ALSO READ: How government can save R12 billion a year – Treasury agency findings

Existing agreements

Chetan Vanmali, partner at Webber Wentzel said 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 VAT rate, 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”.

However, the vendor may not rely on the provisions of section 67 if there is a written agreement to the contrary.

The written agreement specifically provides that the vendor may not recover any increase in the VAT rate. 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

He added that a vendor can claim VAT relief where a debt relating to a taxable supply for which the vendor has accounted for output tax is treated as “irrecoverable.”

The vendor may have accounted for VAT at 15% on a supply made before 1 May 2025, but the consideration for the supply is now regarded as “irrecoverable.”

“What rate of tax should be applied? Regarding section 22(1) of the VAT Act the vendor may only claim relief based on the VAT rate that applied to that particular supply (i.e. 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.”

NOW READ: Zero VAT rating of products does not help poor people – expert