PLEASE NOTE: – as of the 24th of April 2025 the The South African National Treasury has officially announced the withdrawal of the proposed VAT increase

South Africa is set to implement a phased increase in its Value-Added Tax (VAT) rate, aiming to bolster government revenue and address fiscal challenges. The VAT rate will rise from 15% to 15.5% on 1 May 2025, followed by a further increase to 16% on 1 April 2026. These changes are part of the government’s broader strategy to improve fiscal stability, but they’ve sparked significant political and legal debates.

Legal and Political Context

The proposed VAT hikes have become a contentious issue within the ruling coalition. The Democratic Alliance (DA), the second-largest party in the coalition, has filed a legal challenge in the Western Cape High Court, seeking to invalidate the 2025/26 national budget and suspend the VAT increase. The DA argues that the budget process was procedurally flawed and that the VAT hike will disproportionately affect the poor. Helen Zille, DA federal council chairperson, stated that Finance Minister Enoch Godongwana violated the Constitution by announcing the VAT increase before parliamentary approval. The DA’s legal action has intensified tensions within the fragile coalition government, raising concerns about its stability.

What the VAT Change Means for Businesses

The VAT increase will affect various aspects of business operations, including:

• Contracts: Review and update long-term contracts to reflect the rate increase.
• Invoices: Ensure the correct VAT rate is applied based on the “time of supply” rule.
• Reporting: VAT reports must clearly separate transactions before and after 1 May 2025.
• Old vs New Rates: Systems must be able to process both the 15% and 15.5% rates during the transition period.

What is the Time of Supply Rule?

The time-based rule (also known as the “time of supply” rule) is a key VAT principle used to determine when a transaction is considered to have occurred for VAT purposes — and therefore which VAT rate applies.

In South Africa, the VAT Act defines the time of supply as the earlier of:

• When an invoice is issued (first), or
• When payment is received (either in whole or in part)

This rule ensures clarity on which VAT rate should be applied — especially important during rate changes, like the one taking place in May 2025.

Accounting Software Adjustments

Pastel Accounting Desktop

Pastel has released a desktop update that includes the new VAT rates and automatically adjusts the VAT codes within the system. Please note that the update is only available in version 19 (Sage50) The update is version 19.4.6. the update can be found at:

https://pastelupdate.sagesouthafrica.co.za

What users need to do:

• Install the latest update before 1 May 2025.
• Review customer and supplier documents created before the VAT change to ensure legacy invoices retain the 15% VAT rate.
• Check recurring invoices and templates to use the new VAT code after the changeover date.
• Reconcile open documents in debtors and creditors to avoid incorrect VAT reporting.
• Test reports and VAT submissions to confirm the correct rates are applied.

Sage Business Cloud (Sage Online)

Sage Online users will benefit from automated VAT rate additions. The system will retain 15% for old transactions while introducing 15.5% for new transactions from 1 May onward.

What users need to do:

• Log in and confirm that the new 15.5% VAT code has been applied.
• Review and adjust bank rules that may be linked to the old VAT rate.
• Update recurring invoices and templates to use the new VAT code after the changeover date.
• Ensure users understand how to treat transitional transactions (supplies before vs after 1 May).

Xero

Xero is also automating the VAT rate transition. The 15.5% rate will be added to users’ VAT settings automatically.

What Xero users should do:

• Check that the new 15.5% VAT code is active.
• Review repeating invoices, bank rules, and inventory settings to ensure correct VAT rates are applied going forward.
• Historical invoices and payments should retain the 15% rate—do not backdate or change previous entries.

Handling Transitional Transactions

Bank Rules

Review and update bank rules in your accounting software to ensure transactions are categorized with the correct VAT rate. This is particularly important for automated processes that may continue to apply outdated rates if not adjusted.

Outstanding Invoices

• Debtors (Accounts Receivable): For invoices issued before 1 May 2025, the 15% VAT rate applies. Payments received after this date should still reflect the original rate.
• Creditors (Accounts Payable): Ensure that supplier invoices dated before the VAT increase are processed with the correct rate. For services or goods received after the rate change, the new VAT rate should be applied.

Conclusion

The upcoming VAT rate changes in South Africa require businesses to proactively adjust their systems, processes, and documentation to ensure compliance. Be proactive now to avoid last-minute chaos come 1 May 2025.