SARS Is Coming for Businesses That Crossed the VAT Threshold — And They're Using AI to Find You

A Brief History — Why Businesses Slipped Through

To understand the severity of what is happening, you need to understand the context of what came before. For many years, VAT registration in South Africa was a notoriously difficult and time-consuming process — deliberately so.

SARS had been devastated by widespread VAT fraud. Fraudulent vendors were submitting fictitious input tax claims, creating paper companies overnight and extracting hundreds of millions of rands from the system. The fiscus was haemorrhaging money.

SARS responded by making VAT registration extremely difficult. The vetting process became severe:

• In-person meetings at SARS offices were required
• Businesses had to prove their operations were genuine and established
• Invoices and financial flows were scrutinised in detail
• Even voluntary registrations were met with scepticism and intensive review
• Applications were routinely rejected or delayed for months

The result was predictable. Many legitimate, growing businesses — who should have registered when they crossed the R1 million threshold — gave up, delayed, or simply never completed the process. Some did not even realise they had crossed the threshold. Others were advised to wait. And so they continued trading above the threshold, unregistered, for months or even years.

SARS, overwhelmed with fraud cases and administrative backlogs, largely left them alone. For a period, the system created a perverse outcome — complying with VAT registration was harder than not complying.

How AI Has Changed Everything

The artificial intelligence landscape has fundamentally transformed SARS's ability to identify non-compliant taxpayers. This is not speculation — SARS has publicly confirmed significant investment in data analytics and machine learning capabilities, and the results are already visible in the assessments being issued across South Africa.

SARS's AI systems can now cross-reference an extraordinary volume of third-party data:

• Bank account data — SARS receives banking information and can analyse transaction flows and credit turnover
• Payment platform data — SnapScan, Yoco, PayFast, and other platforms submit data to SARS
• UIF and PAYE submissions — payroll data indicates business size and activity levels
• Industry benchmarks — AI flags businesses whose declared income appears inconsistent with their sector and scale
• Third-party supplier data — suppliers issue tax invoices which SARS can cross-reference against buyer declarations
• Property and asset registrations — visible assets that are inconsistent with declared income

The result is that SARS can now identify, with considerable accuracy, businesses whose turnover likely exceeded the VAT threshold — even when those businesses submitted no VAT returns at all. The algorithm does the work. Human auditors then follow up.

The Retrospective VAT Problem — What Businesses Are Facing

Here is the situation that is now playing out across South Africa — and it is causing genuine financial distress for business owners who had no intention of evading tax.

Imagine a business that grew steadily and crossed R1 million in annual turnover in 2022. They should have registered for VAT. For whatever reason — difficulty with the process, bad advice, lack of awareness, administrative overwhelm — they did not. They continued trading. Now SARS identifies them.

SARS does not simply say "please register from today." They say: "You were required to register from 2022. We are assessing you for VAT on all your taxable supplies from that date forward."

At 15% VAT on three years of turnover, this is a potentially business-ending liability.

The tragedy is compounded by a practical reality that makes this even more painful:

• The business never raised VAT on its invoices — clients paid VAT-exclusive prices
• Going back to clients to collect VAT years later is practically impossible
• The business cannot simply absorb 15% of its historical revenue as a tax cost
• The liability arrives as a SARS assessment — with interest and penalties on top

Is There Any Relief? — What Can Actually Be Done

The situation is serious but it is not always hopeless. There are several mechanisms that an experienced tax practitioner can use to mitigate the damage — but they require acting quickly and correctly.

1. Input VAT Claims

The key offsetting factor is that a business registered retrospectively is not only liable for output VAT on its sales — it also becomes entitled to claim input VAT on qualifying purchases and expenses made during the same period. Depending on the nature of the business, the input VAT claims can significantly reduce the net VAT liability. A business with substantial purchases, stock, equipment, or services from VAT-registered suppliers may find its net liability considerably lower than the gross output VAT figure.

Reconstructing these input VAT claims requires meticulous record-keeping and the ability to locate old tax invoices — which is exactly why having your financial records on a cloud system like Xero, with Hubdoc document storage, is so critical.

2. Voluntary Disclosure Programme (VDP)

SARS's Voluntary Disclosure Programme allows taxpayers who have not fully complied to come forward and make full disclosure before SARS approaches them. The significant advantage is this: if you approach SARS through the VDP, SARS will typically reduce or waive penalties and in some cases interest. The liability itself cannot be eliminated — but the punitive additions can be substantially reduced.

The critical requirement is timing. The VDP is only available to taxpayers who have not yet been audited, selected for audit, or approached by SARS on that specific liability. Once SARS contacts you, the window closes.

3. Payment Arrangements

Even where the net liability after input VAT is significant, SARS has mechanisms to agree formal payment arrangements. A properly structured and presented arrangement — showing good faith compliance and a realistic repayment plan — can spread the liability over time and preserve the business as a going concern.

The key is professional presentation. SARS is far more receptive to an approached and structured arrangement than to a business that has received an assessment and simply cannot pay.

4. Register Immediately — Before SARS Finds You

If you believe your turnover has exceeded or may have exceeded the VAT threshold in any period and you have not yet registered — register now. Every day that passes increases your retrospective exposure. A voluntary registration today, even if it comes with historical liability, demonstrates willingness to comply. It also allows the conversation with SARS to begin on your terms rather than theirs.

The New R2.3 Million Threshold — What It Means Going Forward

There is one genuinely positive development in this landscape. The compulsory VAT registration threshold has been increased from R1 million to R2.3 million in taxable supplies per twelve-month period.

For businesses currently trading between R1 million and R2.3 million per year, this means that from the effective date of the new threshold, the compulsory registration obligation falls away. You are no longer legally required to register for VAT at that level of turnover.

However — and this is critical — the new threshold does not extinguish any historical liability that arose when the old R1 million threshold applied. If your business exceeded R1 million in a prior period, the obligation existed then, and SARS can still pursue it.

The new threshold does, however, create an opportunity. Businesses that voluntarily register for VAT at turnover levels below R2.3 million may benefit from the ability to claim input VAT — making it potentially advantageous to be VAT registered even when not compelled to be.

Why Your Accounting System Is Now a Risk Management Tool

The VAT crisis unfolding across South Africa makes one thing starkly clear: the quality and accessibility of your financial records is now a critical risk management issue, not just an administrative one.

Businesses that can reconstruct their complete financial history — every invoice issued, every purchase made, every supplier payment — are in a fundamentally different position to those who cannot. The difference between a manageable VAT settlement and a business-ending assessment often comes down to whether you can prove your input VAT claims.

This is precisely why cloud accounting on Xero, combined with Hubdoc for document capture and storage, is not a luxury — it is a necessity. Every invoice is stored and linked to its transaction. Every supplier invoice is captured and retrievable. A SARS audit or VDP application can be responded to in hours rather than weeks.

The AI that SARS is using to find non-compliant businesses can also be countered by the AI-powered tools available to compliant businesses. The business that has clean, complete, cloud-based records — with every transaction linked to its documentation — is the business best positioned to manage whatever SARS presents.

How Your Accountant® Can Help

At Your Accountant®, we have direct experience navigating complex SARS engagements — from VAT registrations and retrospective assessments through to Voluntary Disclosure applications and payment arrangements. As a Registered Tax Practitioner and SAIT member, Chris Schutte is authorised to represent clients before SARS and has the expertise to manage these situations professionally and confidentially.

If you are facing any of the following situations, contact us immediately — the earlier we engage, the more options are available to you:

• Your annual turnover has exceeded or may have exceeded R1 million in any period since 2020 and you have not been VAT registered
• You have received correspondence from SARS regarding VAT registration or assessment
• You are unsure whether your business should be or should have been VAT registered
• You want to assess your retrospective VAT exposure before SARS approaches you
• You need help reconstructing historical financial records to support input VAT claims
• You want to explore a Voluntary Disclosure before SARS selects you for audit

We also help businesses get the right systems in place — Xero, Hubdoc, and the correct accounting framework — so that future compliance is automatic, your records are always audit-ready, and the stress of a SARS engagement is minimised.

Frequently Asked Questions