VAT Deregistration in South Africa: When and How to Deregister

VAT deregistration becomes necessary when a business no longer meets the requirements for VAT registration or ceases trading. Understanding when and how to deregister for VAT is important to avoid ongoing compliance obligations and potential penalties. This guide explains the VAT deregistration process in South Africa, including when deregistration is required, how to apply, and important considerations.

When Should You Deregister for VAT?

Several circumstances may require or allow you to deregister for VAT with SARS.

Ceasing to Trade

If you close your business and stop making taxable supplies, you must deregister for VAT. This applies whether you formally wind up the business, sell it, or simply stop trading. Continuing to be VAT registered when not trading creates unnecessary compliance burdens.

Falling Below the Threshold

If your annual taxable supplies fall below R1 million, you may choose to deregister. While deregistration is not mandatory in this case, it may be beneficial if the administrative burden of VAT compliance outweighs the benefits of being registered.

Change in Business Activities

If your business changes its activities so that it no longer makes taxable supplies, deregistration may be appropriate. For example, if you switch from selling standard-rated goods to providing only exempt financial services, VAT registration would no longer be relevant.

The Deregistration Process

Deregistering for VAT involves a formal application to SARS and several important steps.

Step 1: Apply for Deregistration

Submit a VAT123 form (Application for Cancellation of Registration) to SARS. This can be done through eFiling or at a SARS branch. The application must include the reason for deregistration and the proposed date of deregistration.

Step 2: File Final VAT Returns

You must file all outstanding VAT returns up to the date of deregistration. This includes the final VAT return covering the period up to when registration ends. Ensure all returns are complete and accurate.

Step 3: Account for Output Tax on Assets

When you deregister, you must account for output tax on any assets that remain in the business on which you claimed input tax. This is because these assets will now be used for non-taxable purposes. The output tax is calculated on the market value of the assets.

Step 4: Receive Confirmation

SARS will review your application and, if approved, issue a notice confirming your deregistration and the effective date. Keep this notice for your records as proof that you are no longer VAT registered.

Output Tax on Deregistration

One of the most important aspects of VAT deregistration is the requirement to account for output tax on remaining assets.

The VAT Act treats deregistration as if you are making a supply of all business assets to yourself. This means output tax is due on assets where input tax was previously claimed. The calculation is based on the lesser of the original cost or the current market value of the assets.

This can result in a significant VAT liability in your final return. Plan for this by identifying all assets on which input tax was claimed and their current values. Consider selling assets before deregistration if the VAT on deemed supply would be substantial.

Special Considerations

Selling a Business as a Going Concern

If you sell your business as a going concern to a VAT-registered purchaser, the sale can be zero-rated if certain conditions are met. This avoids the need to charge VAT on the sale price and may simplify the deregistration process.

Outstanding VAT Refunds

If you have outstanding VAT refunds, ensure these are processed before or as part of deregistration. Once deregistered, recovering refunds may become more complicated. Follow up with SARS on any pending refunds before finalizing deregistration.

Record Retention

Even after deregistration, you must retain your VAT records for five years. SARS may audit past periods even after you are no longer registered. Keep all invoices, returns, and supporting documentation safely stored.

Consequences of Not Deregistering

Failing to deregister when you should can create problems. You will continue to have obligations to file VAT returns, even if showing nil activity. Failure to file these returns results in penalties and administrative fines. Your compliance status will deteriorate, affecting future dealings with SARS.

Conclusion

VAT deregistration is an important process that requires careful planning and execution. Understanding when deregistration is appropriate, the steps involved, and the tax implications ensures a smooth transition out of the VAT system.

For help calculating the output tax on assets or any other VAT figures related to deregistration, use our VAT calculator.