VAT Increase to 15.5% on 1 May 2025 - Practical Implications
Introduction
During the Minister of Finance’s Budget Speech on 12 March 2025, it was announced that the standard VAT rate will increase in two phases. The first increase of 0.5% to 15.5% will take effect from 1 May 2025, and the second 0.5% increase to 16% on 1 April 2026.
Below we address the immediate actions that need to be taken by VAT registered businesses.
Price lists and advertised prices
- Businesses with pre-existing advertised prices and price lists may display a notice on your website and place of business stating that the published prices exclude the VAT increase and will be adjusted when invoiced. This notice can remain in place until 31 August 2025 and must be clearly displayed.
- Businesses using pre-printed invoices reflecting the old VAT rate, may continue to use these for six months after 1 May 2025, but the adjusted VAT rate must be applied regardless of the rate printed on the invoice.
Software considerations
- Points-of-Sale Systems and in-house accounting software should be updated with the correct VAT rate if these are not automatically updated by the software developers.
- Online financial/accounting systems which are commonly used by businesses will be updated to incorporate the new VAT rate.
Time of Supply Rules – General
- Understanding the “time of supply” is crucial, as it determines when VAT liability is triggered.
- The general time of supply is the earlier of the invoice or the receipt of the payment.
- If an invoice is raised or payment is received before 1 May 2025, the applicable VAT rate remains 15%, however, if the invoice and payment occur on or after 1 May 2025, the new VAT rate of 15.5% will apply.
- For goods and services spanning the rate change (e.g., starting before but ending after 1 May 2025), a fair and reasonable apportionment must be made. However, VAT must still be accounted for in the tax period in which the supply occurs;
Time of Supply - Transitional Rules
Despite the general time of supply rules note above, the VAT Act contains transitional rules which apply when there is a change in the VAT rate which are outlined below.
- Ongoing Contracts
Contracts such as property rentals, construction, cleaning, insurance, and subscription services often require advance payment at the beginning of the month. The increased VAT rate applies to any payment due or received on or after 1 May 2025. For these contracts, the time of supply is determined by the contract itself, not by the invoice date. Therefore, invoices issued early for the period from 1 May 2025, should reflect the new VAT rate. Where construction activities (other than in relation to a new dwelling) commence before, and end after 1 May 2025, the contractor is required to apportion the value of goods delivered and services performed on a fair and reasonable basis between the period before 1 May 2025 and the period thereafter. The portion of the consideration payable for construction supplies which is attributable to the period before 1 May 2025 will be subject to VAT at 15%, whereas the portion of the consideration payable for the construction supplies for the period thereafter will attract VAT at 15,5%. - Instalment Sale Agreements and Finance Leases
These are treated differently from ongoing contracts. If goods are delivered before 1 May 2025, the old VAT rate of 15% applies. However, monthly VAT on service fees under such agreements will increase accordingly to 15.5% from 1 May 2025. - Commercial and residential property sale transactions
For property sales, the VAT rate is determined by the date of registration in the Deeds Office or the date of payment, whichever is earlier. A deposit held in trust is not considered a payment of the purchase price until it becomes non-refundable. However, the higher VAT rate will apply when time of supply is triggered. In the case of residential property, if a written, binding legal agreement is concluded before 1 May 2025, the lower VAT rate applies, even if suspensive conditions exist. However, it is imperative that the contract must state the VAT-inclusive price. - Residential property rental agreements
The supply of a dwelling to a person under an agreement for the letting and hiring thereof is exempt from VAT. Consequently, the VAT rate increase will not impact residential rentals, although utility charges such as water, electricity, sanitation and refuse removal charges will increase as a result of the VAT rate change. - Commercial property rental agreements
Section 67 of the VAT Act allows landlords to recover the additional VAT payable as a result of the VAT rate increase from tenants, unless the lease agreement stipulates otherwise. Rental charges for periods of rental prior to 1 May 2025 are subject to VAT at 15%, while rental charges for periods commencing on or after 1 May 2025 will be subject to VAT at 15,5%. This applies irrespective of whether the lessor issues an invoice for the rental charges before or after 1 May 2025.
Where rental payable spans the effective date of 1 May 2025, the lessor is required to apportion the rental on a fair and reasonable basis between the period before 1 May 2025, and the period thereafter. The portion of the rental payable which is attributable to the period before 1 May 2025 will be subject to VAT at 15%, whereas the portion of the rental payable for the period thereafter will attract VAT at 15,5%. The lessor will be required to substantiate that the apportionment was done on a fair and reasonable basis. - Importation of Goods and Services
The VAT rate on imported goods is determined by the customs clearance date. If customs clear the goods after 1 May 2025, the new rate applies, even if the goods arrived in South Africa before 1 May 2025.
For imported services, the VAT rate is determined by the earlier of:- The supplier issuing an invoice.
- The recipient making a payment.
- Other Specific Types of Transactions Affected
Other specific types of transactions subject to the time of supply rules under the transitional provisions:- Supply of Goods and Services Between Connected Parties
- Estate Agent Commission
- Deposits made in respect of Guest House Accommodation
Anti-avoidance Rules
To prevent early invoicing or payments from avoiding the new VAT rate, the following transactions will be taxed at 15.5%:
- Goods invoiced before, but supplied more than 21 days after 1 May 2025;
- Services invoice before but performed more than 21 days after 1 May 2025.
These supplies are deemed to occur at the new rate and must be included in that tax return period. This rule does not apply to residential property transactions or to normal business practice which have long lead times.
Other Key Considerations
- No additional input tax can be claimed on trading stock held at the time of the VAT increase;
- Ensure that your suppliers correctly apply the VAT rate on invoices. Request a credit note and new invoice where the incorrect rate is applied;
- Debit or credit notes relating to transactions before 1 May 2025, must use the old VAT rate (15%);
- Tax Computation of input and output tax on VAT201 returns must contain the correct VAT rates.
Conclusion
Vendors are encouraged to be proactive in implementing the VAT increase by taking steps prior to 1 May 2025 to ensure that your businesses are prepared and will be compliant levying VAT at the correct rate on any supply of goods or services. Prices charged by vendors are deemed to include VAT, so any under-declaration of VAT would result in reduced profit margins along with penalties and interest being imposed by SARS. Should you require assistance in ensuring that your business remains compliant please do not hesitate to contact us for assistance.