Value-Added Tax (VAT) remains one of the most powerful revenue instruments available to the South African fiscus. In practical terms, it continues to rival personal income tax as a primary contributor to government revenue. It also remains indispensable to the South African Revenue Service (SARS)’s collection mandate. This reality matters.
Where a tax type accounts for such a significant portion of national revenue, enforcement is never passive. In 2026, VAT sits at the centre of SARS’s enforcement agenda. As a result, it represents significant VAT enforcement risks for businesses.
Despite this, many organisations still treat VAT as an administrative function. They submit returns, reconcile balances and obtain audit sign-off. Consequently, management often assumes that risk has been managed. However, that assumption is increasingly difficult to justify.
Revenue protection and enforcement
Because VAT remains one of the largest sources of revenue for the State, SARS approaches it differently from other taxes.
Under-collection of VAT directly erodes the State’s revenue base. Therefore, SARS shows little tolerance for uncertainty, informal practices, or positions that lack a legal foundation. This environment increases VAT enforcement risks for non-compliant or weakly supported positions.
In this environment, VAT disputes often escalate beyond audits and objections. Many cases reach the Supreme Court of Appeal. In some instances, they proceed to the Constitutional Court.
These matters turn on legal interpretation and statutory construction. They also assess whether the adopted VAT position aligns with the requirements of the Value-Added Tax Act, No. 89 of 1991 (VAT Act).
How VAT risk accumulates over time
VAT risk develops incrementally. Businesses often adopt a VAT position early. They shape it through commercial decision-making and embed it into practice. Then, they apply it consistently without legal challenge.
Over time, business operations evolve and become more complex. However, VAT treatment often remains unchanged and legally untested. As a result, VAT enforcement risks increase as historical positions remain unreviewed.
SARS scrutiny usually arises from specific trigger events. These include refund claims, restructurings, acquisitions, cross-border transactions, and multi-period reviews. In such cases, SARS focuses on the legal foundation of the VAT position itself.
Where VAT risk is most acute in 2026
The most significant VAT exposure in 2026 arises in complex and non-standard environments. Cross-border supply chains continue to expand. Digital offerings and electronic services also grow rapidly.
At the same time, property and project-based activities increase. These include acquisitions, developments, leasing, and construction. In addition, group structures become more complex, which creates intragroup and multi-entity transactions.
In reality, VAT outcomes depend on precise legal characterisation. A supply may be taxable, zero-rated, exempt, or outside the scope of VAT. This classification depends on statutory interpretation rather than commercial intent.
Errors in these areas can create material historic exposure. This risk increases when businesses replicate errors across contracts or tax periods, thereby amplifying VAT enforcement risks.
Audit sign-off does not eliminate VAT risk
A persistent misconception is that audit sign-off mitigates VAT risk. Auditors play a vital role in financial reporting. However, they do not have a mandate to resolve legal uncertainty under the VAT Act.
If a VAT position cannot be defended with reference to the VAT Act, relevant case law, and accepted interpretive principles, it remains exposed. This exposure exists regardless of how long the position has been applied. Therefore, second opinions have become critical. This is especially true where VAT treatment is complex or the exposure is material, and where VAT enforcement risks may already exist.
SARS enforcement in a constrained revenue environment
Given VAT’s importance to revenue collection, SARS applies strong enforcement measures. These powers allow retrospective scrutiny, which creates significant legal risk in 2026.
When SARS identifies incorrect VAT treatment, it often reassesses multiple years. As a result, exposure compounds over time. This includes VAT liabilities, interest, understatement penalties and the denial of input tax or zero-rating claims. These outcomes further heighten VAT enforcement risks.
In more serious cases, VAT non-compliance may also trigger criminal implications. These arise under the Tax Administration Act, No. 28 of 2011. Once disputes escalate, the issue extends beyond VAT. It begins to affect governance, internal controls, and oversight. At that stage, the cost of inaction is already fixed.
What businesses should be doing now
Moving forward, businesses must manage VAT as an ongoing legal risk. This requires specialist oversight.
Organisations should subject complex or non-standard VAT positions to specialist legal review. This is particularly important in cross-border or high-value transactions. Reviews should assess both historic VAT treatment and current application under commercial and contractual arrangements.
Seeking specialist VAT legal input before SARS intervention allows businesses to identify exposure early. It also enables them to implement defensible frameworks and reduce VAT enforcement risks proactively.
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| Micaela Paschini | Team Lead | Tax Legal | mail me | | Megan Langton | Tax Attorney | mail me | |
| | Tax Consulting SA | | |
