Private school tax warning in South Africa

A proposed amendment to the Draft Taxation Laws Amendment Bill could leave South African schools facing severe cashflow strain, legal experts at Bowmans have warned.

In a recent analysis, Barry Garven, Mogola Makola and Aneria Bouwer explained that many schools rely on income from taxable commercial activities.

This includes hiring out sports fields and halls, offering accommodation during certain times of the year, and operating tuckshops.

Schools that earn more than R1 million from such activities are currently required to register for VAT and may claim partial input-tax credits because their core educational services are VAT-exempt.

However, National Treasury now wants to remove schools from the VAT system entirely.

The draft amendment proposes that all goods and services supplied by schools registered under the South African Schools Act be exempt from VAT from 1 January 2026.

This means that all VAT-registered schools will be forced to deregister, even though their commercial activities will continue.

Under existing VAT rules, any entity that deregisters is deemed to have supplied all assets of its enterprise immediately before deregistration, triggering a VAT liability on the lower of the asset’s cost or market value.

This mechanism is meant to recoup the benefit of input-tax credits previously claimed.

But Bowmans argues that the proposal fails to account for schools’ limited ability to claim input VAT in the first place.

A school whose activities are 95% exempt and 5% taxable, for instance, may have claimed VAT on just 5% of a new hall’s cost.

Yet, on deregistration, it could be required to pay VAT on the full value of that same hall. No apportionment or relief is currently provided for.

Although the amendment allows the exit VAT to be paid over 12 monthly instalments, Bowmans says this offers little comfort.

Schools, unlike most deregistering vendors, hold sizeable asset bases, and some assets may have been acquired long before they were VAT-registered.

The shift carries major financial implications:

• Loss of input VAT claims: Schools will no longer be able to recover VAT on operational expenses, increasing running costs.
• Administrative burden: Schools must prepare to adjust accounting systems and invoicing to reflect VAT exemption.
• Potential claw-backs: SARS may audit claimed input VAT previously, exposing schools to repayments, penalties, and interest.

The firm describes the amendment as “unprecedented” and says it has caused significant concern in the education sector.

According to Bowmans, the proposal effectively treats schools differently from other entities conducting identical commercial activities, with no clear justification.

They warn that the financial shock could affect schools’ ability to maintain facilities, hire staff, expand infrastructure and run outreach programmes.

Bowmans said that it has submitted to National Treasury and SARS to highlight what it argues are the amendment’s unintended and potentially damaging consequences.