Understanding the 2025 VAT increase: Key considerations for South African business owners

Short-term effects: Increased operating costs and pressure on cashflow

One of the first and most noticeable impacts will be the rise in day-to-day operating costs. The increase in VAT applies to goods and services across the board, affecting procurement, service delivery, and, ultimately, pricing. For SMEs, the decision between absorbing these costs or passing them on to customers is not straightforward. Both approaches carry financial risk — either through reduced margins or potential drops in sales due to higher prices.

In addition, businesses that are VAT-registered will need to adjust their cashflow planning to account for the higher output tax. Delayed payments, poor bookkeeping, or incorrect submissions could result in penalties from SARS, putting further strain on businesses already facing financial headwinds. Industries such as retail, hospitality, and food services, which often work with thin margins, are likely to feel the impact more acutely.

Service providers, including those in construction, consulting, and education, will also need to revisit pricing models and potentially renegotiate client contracts to reflect the increased tax burden.

Longer-term considerations: Slower growth and greater risk of tax debt

Over time, the higher VAT rate may contribute to a dampened economic climate. As consumers adjust to reduced disposable income, discretionary spending could fall, impacting businesses across multiple sectors. This may trigger a chain reaction—slower sales, constrained cashflow, and in some cases, workforce reductions or business closures.

A further concern is the growing risk of accumulating tax debt. Businesses that are unable to meet their VAT obligations may fall behind, facing interest charges, penalties, or even legal proceedings from SARS. Without timely intervention, this situation can escalate quickly.

While larger organisations may have the means to cushion the blow, SMEs often lack the financial buffers needed to adapt without making difficult decisions — such as cutting costs, downsizing, or restructuring.

How to get ahead of the change

Though the VAT hike presents real challenges, there are practical steps that businesses can take to protect themselves and adapt proactively:

• Evaluate and adjust pricing – Reconsider pricing strategies to reflect increased costs, while remaining competitive. Clear communication with customers about any changes is vital to maintaining trust and transparency.
  
• Improve cashflow management – Monitor receivables closely and introduce more efficient systems for invoicing and payment collections. Plan ahead for upcoming tax periods to ensure that VAT liabilities can be met without disrupting operations.
  
• Enhance tax compliance – Take this opportunity to review all tax processes. Regularly checking for errors and ensuring timely submissions can prevent penalties and maintain good standing with SARS.
  
• Reduce unnecessary expenses – Look for savings in the business. This might include renegotiating terms with suppliers, adopting more efficient practices, or postponing non-essential expenditures.
  
• Seek expert advice when needed – If a business is already under pressure from existing tax debt, professional support is essential. Tax practitioners can offer guidance on negotiation strategies, payment arrangements, and compliance solutions.

Addressing Tax debt proactively

Ignoring tax debt is not a viable strategy, especially in a shifting economic environment. Business owners who tackle the issue early stand a better chance of negotiating manageable payment terms and avoiding legal escalation. Working with professionals who specialise in tax debt resolution can provide peace of mind and a clear plan of action.

Staying resilient in uncertain times

While the VAT increase adds another layer of complexity for South African businesses, preparation remains the best form of protection. Through forward planning, strong financial management, and timely professional advice, businesses can navigate the coming changes with greater confidence. Those who act now will not only minimise disruption but also strengthen their long-term resilience.