VAT year‑end housekeeping for medium businesses

Your VAT year-end is the single best opportunity to recover overlooked input tax, correct errors before SARS finds them, and ensure your apportionment ratio reflects reality.

For medium businesses juggling both taxable and exempt supplies, the stakes are especially high in 2025/2026. BGR 16 (Issue 3) has introduced mandatory new reporting obligations that many finance teams have not yet embedded in their processes.

SARS’s intensified audit programme, Project AmaBillions, means audit-readiness is no longer optional.

This guide walks you through every critical VAT housekeeping step: apportionment, bad-debt relief, invoice compliance, and reconciliation.

Here’s what we’ll cover:

The VAT rate stayed at 15%, but the turbulence left lessons

The 2025 Budget Speech proposed a phased VAT increase to 15.5% from 1 May 2025, planned to take effect on 1 May 2025.

The VAT increase was planned to start on 1 May 2025, but it was reversed by Government Notice on 24 April 2025.

In practice, SARS said vendors should continue charging 15% from 1 May, not 15.5%, while allowing a short window for businesses that needed time to revert system changes.

After the increase was announced, it was reversed by notice on 24 April 2025, and the VAT rate remained at 15% from 1 May 2025.

SARS allowed a short adjustment window until 15 May 2025 for vendors that couldn’t immediately revert to 15% because of complex system changes.

Where a vendor couldn’t revert in time, SARS said those 15.5% transactions could be accounted for at 15.5% until the system change was completed (no later than 15 May).

If any supplies were processed at 15.5% during the changeover period (because a vendor couldn’t revert immediately), SARS said those amounts must be reported in VAT201 Field 12 (output tax) and Field 18 (input tax).

Any related 0.5% adjustments or refunds should also be reflected in those same fields.

The episode was a useful reminder to keep your VAT setup flexible.

If guidance changes close to implementation dates, you can update pricing, invoicing, and reporting quickly without disrupting customers or month-end processes.

Medium businesses should maintain a documented contingency plan covering system updates, transitional invoicing rules, and contract review processes.

Multiple analysts expect the 2026 Budget to revisit revenue measures given the R75 billion shortfall left by the reversal.

Several other substantive changes also took effect through the Taxation Laws Amendment Act 42 of 2024.

The accounting period for imported services was extended from 30 to 60 days.

Updated Electronic Services Regulations (effective 1 April 2025) introduced a B2B exemption for foreign suppliers whose South African customers are exclusively VAT-registered.

Section 22(2) was amended to require output tax repayment when debts transferred at face value are later recovered by the transferee.

VAT apportionment under BGR 16 Issue 3

If your business makes both taxable and exempt supplies, Section 17(1) of the VAT Act requires you to apportion input tax.

The default method is the Standard Turnover-Based Method (STBM) prescribed by Binding General Ruling 16. Issue 3, effective for financial years commencing on or after 1 January 2024, is a fundamental overhaul of the previous two-page ruling, now spanning 18 pages.

The three-pool approach

Every vendor making mixed supplies must categorise input tax into three pools.

• Pool 1 covers expenses wholly for taxable supplies (100% claimable).
• Pool 2 covers expenses wholly for exempt supplies (0% claimable).
• Pool 3 covers mixed-purpose overheads and shared costs, to which you apply a turnover-based apportionment ratio.

De minimis thresholds simplify the process at the extremes:

if your ratio is 0.95 or higher, you may claim 100% of Pool 3 input tax. If taxable supplies represent 5% or less, no Pool 3 input tax is claimable.

What changed

BGR 16 Issue 3 introduced 12 categories of exclusions from the ratio calculation, including capital asset proceeds, extraordinary income, and fair value adjustments.

For non-financial enterprises, investment interest and dividends must be adjusted using specific proxy formulas before they enter the calculation.

These adjustments prevent passive income from distorting the ratio — but they add considerable complexity.

Your tax practitioner or accountant should be involved in getting these right.

The annual true-up and mandatory SARS reporting

Most vendors apply the previous year’s ratio as a provisional figure, then perform a true-up adjustment within nine months of the financial year-end.

The adjustment is the difference between input tax claimed at the provisional ratio and what should have been claimed at the actual ratio.

Note 8 of BGR 16 Issue 3 introduced a mandatory annual reporting obligation that many businesses have overlooked.

At the same time the true-up is reflected, vendors must email SARS (at [email protected]) with their registered name, VAT number, apportionment method, and the annual ratio.

First-time applicants must also submit ratios for the preceding three financial years.

Common mistakes

The most consequential error is failing to apply for an alternative method in time.

The Supreme Court of Appeal confirmed in Mukuru Africa v CSARS (2021) that SARS cannot approve alternative methods retrospectively.

If the STBM produces an unfair result for your business, you must apply before the relevant year-end.

Other frequent errors include using gross interest or dividends instead of adjusted amounts, failing to exclude capital asset proceeds, and neglecting the mandatory SARS reporting under Note 8.

Bad-debt relief: when and how to claim

Section 22 of the VAT Act lets invoice-basis vendors recover VAT previously paid on debts that become irrecoverable.

The relief is valuable but technically demanding, and SARS auditors scrutinise claims closely.

Three conditions must be met

You may claim bad-debt relief under Section 22(1) only if a taxable supply was made at the standard rate, you’ve already accounted for and paid the output tax to SARS, and you’ve formally written off the debt as irrecoverable.

The deduction is calculated as the irrecoverable amount multiplied by the tax fraction (15/115) and entered in Field 17 of the VAT201.

A provision for doubtful debts does not qualify.

The debt must be actually written off, supported by evidence that recovery has been exhausted or the cost of further pursuit exceeds the likely recovery.

Watch for the 12-month clawback

Section 22(3) catches many businesses off guard, and it applies on the debtor side.

If your business claimed input tax on an invoice-basis purchase and hasn’t paid the full amount within 12 months, you must account for output tax on the unpaid amount — effectively reversing your input tax claim.

Finance teams should monitor aged payables specifically for this trigger.

When you recover a written-off debt

Under Section 22(2), any amount recovered after bad-debt relief was claimed triggers an output tax liability in the period the payment is received.

If your business sells written-off debts to a collection agency, recovery by the transferee now triggers an output tax obligation following the 2024 amendments.

A worked example

A vendor invoices R57,500 (VAT-inclusive at 15%) on 1 March 2025, declaring R7,500 output tax.

The customer pays R23,000 in June, leaving R34,500 outstanding.

After exhausting collection efforts, the vendor writes off R34,500 in November 2025.

The bad-debt relief claim: R34,500 × 15/115 = R4,500 in Field 17.

In March 2026, a collection agency recovers R11,500.

The vendor must declare output tax of R11,500 × 15/115 = R1,500 in the March 2026 return.

Invoice compliance and audit-readiness

SARS’s automated risk-assessment system cross-references every VAT201 submission against pre-set parameters.

Large refund claims, turnover discrepancies between VAT201 and IT14 returns, and high input-to-output ratios all trigger verification.

Under Project AmaBillions, SARS has intensified VAT policing specifically to offset the revenue shortfall from the abandoned rate hike.

What makes a valid tax invoice

Under Section 16(2), you may only claim an input tax deduction while in possession of a valid tax invoice.

For transactions of R50 or less, a till slip showing the supplier’s name and VAT number is sufficient.

Between R50.01 and R5,000, you need an abridged tax invoice under Section 20(5) with supplier details, serial number, date, description, and VAT amount.

Over R5,000, a full tax invoice under Section 20(4) is required, adding the recipient’s name, address, and VAT number.

Missing any required element gives SARS grounds to disallow the claim.

Credit and debit notes under Section 21 need particular attention.

SARS has flagged non-compliance with two requirements: a brief explanation of the circumstances, and sufficient information to identify the original transaction.

Many accounting systems don’t automatically populate these fields.

Common audit findings

The errors SARS finds most often in medium businesses include:

• turnover mismatches between VAT201 returns and the IT14 income tax return (the single most frequent escalation trigger),
• zero-rated supplies not declared in Fields 2/2A,
• capital goods input tax misclassified in Field 15 instead of Field 14,
• missing output VAT on insurance proceeds or asset disposals,
• motor vehicle private-use clawback not calculated in Field 12,
• input tax claimed on prohibited items under Section 17(2) like entertainment and club subscriptions,
• and imported services reverse charge not applied for digital services.

When SARS issues a verification request, you typically have 21 business days to respond.

Non-response results in an estimated assessment that disallows all input tax for the period.

Your year-end VAT housekeeping checklist

These are the specific actions that prevent audit findings, protect input tax claims, and ensure the apportionment adjustment is correct.

Reconcile everything before you file.

Match your VAT control account to the sum of output and input fields across all VAT201 periods filed.

Request a VAT Statement of Account (VATSOA) via eFiling and reconcile it to your records.

Confirm every return shows green status on the VAT Filing Control Table.

Reconcile total turnover reported across all VAT201 returns to revenue in your annual financial statements, and document every reconciling item in a formal working paper.

Review and validate input tax claims.

Verify a sample of high-value invoices for Section 20(4)/20(5) compliance.

Confirm no claims were made on Section 17(2) prohibited items.

Check all supplier VAT numbers using the SARS VAT Vendor Search tool at secure.sarsefiling.co.za.

Process the apportionment annual adjustment.

Calculate the actual ratio using current-year figures under BGR 16 Issue 3.

Compare to the provisional ratio applied during the year.

Process the true-up in the month-8 VAT return. Submit the mandatory annual report to SARS by email.

Clean up bad debts and change-in-use adjustments

Review aged debtors for genuinely irrecoverable debts and process formal write-offs before claiming Section 22 relief.

Examine aged payables for amounts unpaid beyond 12 months where input tax was claimed — the Section 22(3) clawback may apply.

Check the asset register for any change in use and calculate Section 18 adjustments.

Verify credit notes, imported services, and fringe benefits

Confirm all credit notes comply with Section 21(3).

Check that reverse-charge VAT on imported services has been self-assessed.

Verify the motor vehicle private-use clawback is calculated and declared in Field 12.

Prepare your audit file

Assemble the following documentation:

• VAT201 returns, VATSOA reconciliation,
• turnover reconciliation,
• apportionment workpapers,
• bad-debt documentation,
• change-in-use calculations,
• supplier verification records,
• and SARS correspondence.

Store electronically in South Africa with backup copies.

This file should be ready to submit within 21 business days of a verification request.

Final thoughts

The businesses that consistently avoid adverse SARS findings share three habits:

• they reconcile VAT to financial statements every period,
• they treat BGR 16 Issue 3 as a live compliance obligation rather than a once-off calculation,
• and they document everything as if an auditor is already in the building.

SARS has been allocated an additional R7.5 billion for improved revenue collection.

The time to identify and correct VAT errors is now, before their automated systems flag them for you.

For the payroll and employment tax side of your year-end compliance, the free Sage Payroll Tax Pocket Guide 2025/2026 covers current income tax tables, travel and subsistence rates, company car fringe benefit values, UIF and SDL thresholds, medical tax credits, and retirement fund contribution limits.