Consumers should not be caught off guard on 1 May 2025 when the higher VAT rate kicks in, as it may happen that they pay more for a product at the till or point of purchase than what the individual product price ticket indicates.

This is indeed in order as long as the VAT-registered vendors prominently display notices in their shops informing customers that the price on the ticket does not include the new VAT rate of 15.5%, and the price will as such be adjusted at the point of purchase.

The Commissioner of the South African Revenue Service (SARS) has given permission that VAT vendors may increase the price of products in stores to include the higher rate of 15.5% without having to change all the individual price tickets, provided customers are duly informed.

In guidance documents about the VAT increase, SARS advises the said notice should also include, with equal prominence, an example of the old and new prices of one of the products and how the adjustments will be made at the point of sale. 

The notices should be prominent at all entrances to the premises where the goods or services are displayed for sale, at all points of sale where payments are made or tax invoices issued and in all print and electronic advertising media and websites. The notices should be removed by no later than the end of August 2025. 

In a FAQ document SARS answers this and other questions from vendors and members of the public about the rate increase to give clarity and ensure consistency on certain practical and technical aspects of implementing the higher VAT rate.

Working around the clock 

Since the announcement of a VAT increase of 0.5% in the 2025 Budget, big corporates and small businesses have been working around the clock to ensure their pricing and accounting systems are ready to reflect the VAT rate of 15.5% from 1 May 2025.

The time it takes companies to adjust to the change, depends on their reporting standards. Large companies who pay for up-to-date accounting systems such as Sage and Xero and have dedicated accountants for their monthly returns, will likely have it easier since their systems would already have a contingency in place for changing VAT rates across the board.

Smaller companies with more simplistic reporting systems may have to manually work through the VAT rates they apply and adjust the rates for all VAT products.

It may take additional time to adjust pricing of newly zero-rated products, including edible offal, dairy liquid blends and canned vegetables.

Advertised prices are deemed inclusive of VAT 

The VAT Act allows for product price increases and the increased tax to be recovered from the customer. Although the vendor can decide if he is going to increase prices, it must be noted that a pricelist is effectively advertising, and prices advertised or quoted are deemed to be inclusive of VAT. Customers will only pay the price they see advertised, quoted or displayed. 

SARS clarifies: “Whether you increase your price or not, your point of sale and accounting systems must be set up to charge and declare VAT on the final price at the increased rate for supplies made on or after 1 May 2025.” 

Financial impacts

The most immediate and visible effect of the VAT increase is the rise in operational costs for businesses. With the rate increase, the cost of goods and services also increase, thereby raising the cost of production. VAT-registered vendors can offset these increased costs by claiming input tax credits, but non-VAT-registered small businesses will bear the full burden of the higher operational expenses.

The VAT increase is expected to strain cash flows, particularly for small and medium-sized enterprises (SMEs) with limited budgets. Some businesses may need to absorb part of the VAT increase to remain competitive and retain their customer base. Not all businesses will be unable to fully pass on the higher costs to consumers which could squeeze profit margins. 

The overall financial impact on companies will differ due to the hugely varied systems used for financial reporting. However, taking into account the additional time spent by administrators and accountants to mitigate the risk of errors in the VAT returns and financial statements, companies will likely notice the increased cost.

Besides direct cost increases, businesses will face additional indirect financial pressures such as the rising cost of compliance. Companies will need to adjust their accounting systems, invoicing procedures, and reporting practices to reflect the new VAT rate, which will involve both administrative time and financial outlay. 

These adjustments will be required from the 1st of May 2025 and again 1st April 2026 as the VAT rate increases incrementally.

Be Aware the Timing Difference

All companies will face the difficulties of the timing difference between issuance of invoices and either paying suppliers or receiving pro-forma customer payments around 1 May 2025 and again around 1 April 2026. For example, companies who regularly receive stock from suppliers and only make out the invoices afterwards, or projects that were partially invoiced before the rate change to which the second portion would need to be accounted for at the increased rate. 

Anywhere there could be a timing difference between an initial order and the issuance of the invoice would be an at-risk transaction for reporting errors (ordering of stock, making out quotations or pro-forma invoices, credit accounts).

VAT returns in 2025 for uneven periods (April/May) will need to be split between 15% and 15.5% rates which will slow down VAT processing and require careful investigation of all supporting documentation during the period to avoid reporting errors.

There is a real concern that the eFiling system may be swamped with verifications and/or requests for corrections which could significantly slow down SARS processes and VAT refunds.

Market-related impacts

The VAT increase will also have widespread effects on consumer behaviour and spending patterns to favoring essential goods and services over discretionary purchases. This may lead to increased demand for zero-rated items while non-essential goods could experience reduced consumer spending.

Conclusion

The VAT increase announced in the Budget is designed to generate an estimated R28 million in additional revenue for the fiscal year 2025/2026 to help fund Government’s spending priorities in fulfilling its service delivery mandate, but it presents several challenges for businesses and consumers alike. 

From higher operational costs to changes in consumer behaviour and increased compliance burdens, the economic landscape will become more complex. Businesses, particularly SMEs, will need to adjust their strategies, tighten financial management, and remain agile in response to these fiscal changes. 

Written by Lee-Ann Nagel, Accountant at Tax Consulting South Africa