The 2026 budget delivered on 25 February 2026 includes several proposed changes to South Africa’s VAT legislation that reinforce the government’s focus on improving certainty, simplifying compliance and addressing gaps that may lead to unintended VAT outcomes. The measures are particularly relevant for businesses operating in special economic zones (SEZs), those using digital and platform‑based models and property and leasing structures, and industries dealing in second‑hand goods or precious metals.
The proposals clarify when services supplied to customs-controlled area enterprises and SEZ operators may be zero‑rated. To qualify, services would need to be physically rendered within the customs-controlled area, a change intended to reduce interpretational disputes and audit risk. This refinement would align the legislation more closely with the policy intent underlying the SEZ incentives.
Additional amendments address the VAT treatment of certain gold supplies and introduce stricter rules for the timing of notional input tax deductions on second‑hand goods. These changes aim to prevent potential revenue leakage, particularly in cases where goods are acquired locally but subsequently exported.
A notable development for the property and commercial leasing sector is the proposed expansion of the VAT adjustment mechanism for leasehold improvements. Under current rules, an adjustment generally applies only when leasehold improvements are made for the benefit of a VAT lessor that is a VAT vendor. This has allowed non‑vendor lessors—such as those below the VAT registration threshold or those making exempt supplies—to receive leasehold improvements without bearing the associated VAT cost.
The proposed amendment would extend the adjustment mechanism requirement to all lessors, regardless of vendor status and introduce a dedicated declaration process. If enacted, this change could affect cash‑flow, pricing and contractual arrangements for tenants funding improvements, particularly in long‑term commercial lease arrangements.
The proposed amendments would shift the default VAT liability for electronic services supplied through digital platforms to intermediary platform operator unless the parties agree otherwise. This measures would reinforce the tax authorities’ ability to collect VAT efficiently and would place greater responsibility on platform operators to manage VAT compliance across their supply chains.
In a welcome development for small businesses, the mandatory VAT registration threshold would increase from SAR 1 million to SAR 2.3 million and the voluntary registration threshold would jump from SAR 50,000 to SAR 120,000, effective 1 April 2026. These adjustments are expected to reduce administrative burdens and support small business growth.
Collectively, the proposed changes to the VAT rules highlight the importance of businesses reviewing their transactions, lease agreements, digital platform arrangements and VAT recovery positions. Early assessment and planning can help mitigate unexpected VAT costs, manage compliance risks and ensure readiness as the proposals move through the legislative process.
Seelan Muthayan
BDO in South Africa
Zero-rating Rules for SEZ-Related Services
The proposals clarify when services supplied to customs-controlled area enterprises and SEZ operators may be zero‑rated. To qualify, services would need to be physically rendered within the customs-controlled area, a change intended to reduce interpretational disputes and audit risk. This refinement would align the legislation more closely with the policy intent underlying the SEZ incentives.
Adjustments for Gold Supplies and Second-Hand Goods
Additional amendments address the VAT treatment of certain gold supplies and introduce stricter rules for the timing of notional input tax deductions on second‑hand goods. These changes aim to prevent potential revenue leakage, particularly in cases where goods are acquired locally but subsequently exported.
Significant Implications for Leasehold Improvements
A notable development for the property and commercial leasing sector is the proposed expansion of the VAT adjustment mechanism for leasehold improvements. Under current rules, an adjustment generally applies only when leasehold improvements are made for the benefit of a VAT lessor that is a VAT vendor. This has allowed non‑vendor lessors—such as those below the VAT registration threshold or those making exempt supplies—to receive leasehold improvements without bearing the associated VAT cost.The proposed amendment would extend the adjustment mechanism requirement to all lessors, regardless of vendor status and introduce a dedicated declaration process. If enacted, this change could affect cash‑flow, pricing and contractual arrangements for tenants funding improvements, particularly in long‑term commercial lease arrangements.
VAT Responsibility for Digital Platforms
The proposed amendments would shift the default VAT liability for electronic services supplied through digital platforms to intermediary platform operator unless the parties agree otherwise. This measures would reinforce the tax authorities’ ability to collect VAT efficiently and would place greater responsibility on platform operators to manage VAT compliance across their supply chains.
Higher VAT Registration Thresholds
In a welcome development for small businesses, the mandatory VAT registration threshold would increase from SAR 1 million to SAR 2.3 million and the voluntary registration threshold would jump from SAR 50,000 to SAR 120,000, effective 1 April 2026. These adjustments are expected to reduce administrative burdens and support small business growth.
BDO Perspective
Collectively, the proposed changes to the VAT rules highlight the importance of businesses reviewing their transactions, lease agreements, digital platform arrangements and VAT recovery positions. Early assessment and planning can help mitigate unexpected VAT costs, manage compliance risks and ensure readiness as the proposals move through the legislative process.Seelan Muthayan
BDO in South Africa