The Hidden Cost of Staying Informal: Why VAT Matters for Small Businesses in South Africa.
In South Africa, informal businesses are a lifeline for millions — with nearly 1.9 million people running small, non-VAT registered businesses as of 2023. These businesses make up about 19.5% of all jobs in the country, according to Stats SA. They are essential for survival in tough economic times, but they also face a challenge many don’t talk about: VAT leakage.
What is VAT Leakage?
VAT leakage happens when informal businesses:
Pay VAT on things they buy (like stock or equipment),
But can’t claim that VAT back, because they’re not registered.
And they also don’t charge VAT to customers, so they don’t benefit from the system.
Why Does This Matter?
While it may seem easier to stay out of the VAT system, there are long-term costs:
No VAT Back – You pay more for your supplies because you can’t reclaim VAT.
Hard to Compete – Other businesses who are VAT-registered can charge the same prices but pay less overall.
Business Can’t Grow – Staying informal means missing out on bigger contracts and opportunities.
Lose Big Deals – Many companies and government tenders prefer or require VAT-registered suppliers.
The Numbers Behind It
Estimates suggest that VAT leakage from the informal sector may range between R10 billion and R30 billion annually. That’s a large chunk of money that could have gone into either government services — or into the pockets of businesses if they were VAT-registered and claiming input VAT.
What Should You Consider?
If you’re a small business owner, think about these simple three-word lessons:
No VAT Back – You pay VAT but don’t get it back.
Hard to Compete – Others can sell cheaper than you.
Business Can’t Grow – You may struggle to get big orders.
Lose Big Deals – Formal companies won’t work with you.
So, What Can You Do?
If your business is approaching R1 million per year in turnover, you are required by law to register for VAT. But even if you’re not there yet, it may be worth exploring VAT registration if:
You buy a lot of stock and pay VAT on it.
You want to work with formal companies.
You are planning to grow your business.
Conclusion
Being informal may feel easier today, but it can cost you more in the long run. Understanding VAT and its benefits could be the key to unlocking bigger growth, better pricing, and new opportunities for your business.