Increase of VAT registration threshold to UGX 250 million

The Uganda Revenue Authority (URA) has now reported that the need to further increase the threshold to UGX 250 million stems from a significant proportion of VAT-registered taxpayers being small businesses contributing minimally to Government’s total VAT revenue. Many file nil returns month after month and in the process continue to bear compliance costs while adding to the administrative workload of the URA. Raising the threshold is expected to allow the URA to concentrate enforcement resources on larger taxpayers and at the same time, free smaller businesses from VAT compliance obligations.

For Small and Medium Enterprises (“SMEs”) with an annual turnover below UGX 250 million, the amendment opens a window to deregister from VAT with effect from 1 July 2026, significantly reduce compliance costs, including the requirement to file monthly VAT returns even in periods with no sales.

However, the decision to deregister requires careful consideration. VAT registration offers several advantages, particularly the ability to claim input VAT on business-related expenses and capital investments. This can improve cash flow, especially for businesses that incur significant VAT on purchases or operate in sectors where clients are also VAT-registered and can recover VAT.

Remaining VAT-registered, even on a voluntary basis, allows businesses to maintain these benefits. However, it also means continued compliance obligations as VAT-registered entities must file monthly returns regardless of whether they have made sales in a month or not. Failure to do so attracts penalties at the higher of the tax due or UGX 200,000 per month.

For businesses that choose to deregister, the process involves submitting an online application through the URA web portal, outlining the reasons for deregistration. URA approval is required and may involve a review of the business’s historical turnover to confirm eligibility under the new threshold.

It is also important to consider the tax implications of deregistration. Once a business exits the VAT system, it can no longer claim input VAT on purchases. Instead, VAT incurred becomes part of the cost base and may be deductible for income tax purposes when computing taxable profits. While this provides some relief, it does not offer the same immediate cash flow advantage as input VAT recovery.

Another key consideration is invoicing compliance. Deregistration from VAT does not eliminate the requirement to issue invoices through the Electronic Fiscal Receipting and Invoicing System (EFRIS) i.e. electronic receipts. Under the Income Tax Act, all business expenses must be supported by valid documentation, including EFRIS-generated receipts or invoices. Non-VAT registered businesses are therefore still required to use the system to support their transactions and to avoid dis-advantaging their clients whose expenses would be dis-allowed for income tax purposes if they are not supported by electronic receipts.

Ultimately, the higher VAT threshold is a welcome development for SMEs, particularly those operating at the lower end of the turnover spectrum. It reduces administrative burdens and allows businesses to focus more on growth rather than compliance.

However, the choice to deregister should not be made solely on the basis of reduced compliance. Businesses must weigh the potential savings against the strategic benefits of remaining within the VAT system, including competitiveness, cash flow management, and alignment with customer expectations.

With 1 July, approaching, now is the time for SMEs to review their turnover levels, assess their eligibility, and evaluate the broader commercial implications of deregistration. Getting professional advice at this stage may also be beneficial to ensure that the decision aligns with the business’s long-term objectives.