Small businesses with annual taxable supplies below Shs250 million will no longer be required to register for Value Added Tax (VAT) following changes introduced under the VAT (Amendment) Act and the 2026/27 national budget, effective July 1, 2026. The adjustment raises the VAT registration threshold from Shs150 million to Shs250 million, allowing enterprises below the new limit to exit the VAT system or voluntarily remain registered depending on their business needs.
The threshold was last reviewed in the 2015/16 financial year when it was increased from Shs50 million to Shs150 million. At the time, the adjustment was attributed to economic growth and the depreciation of the shilling, which had reduced the value of the previous threshold.
However, the latest increase is largely aimed at reducing administrative pressures on small businesses and improving tax administration efficiency. The Ministry of Finance, Planning and Economic Development said the review was intended to ease compliance burdens on small enterprises while enabling the Uganda Revenue Authority (URA) to concentrate its resources on larger taxpayers.
URA has also argued that a significant number of VAT-registered taxpayers are small businesses that contribute minimally to overall VAT collections, with many regularly filing “nil” returns.
For such businesses, VAT registration often creates additional compliance costs without a corresponding improvement in profitability. It also increases URA’s administrative costs in managing taxpayers who generate little or no VAT revenue.
The new threshold means some enterprises can voluntarily deregister from VAT, potentially reducing compliance expenses. However, tax experts caution that businesses should carefully assess the implications before leaving the VAT system.
“VAT registration offers several advantages, particularly the ability to claim input VAT on business-related expenses and capital investments,” says Juliet Najjinda Mutabaazi, Associate Director, Tax at PwC Uganda.
She explains that input VAT recovery can improve cash flow, especially for businesses with significant VAT costs on purchases or those operating in sectors where their clients are also VAT-registered and able to claim VAT.
“Remaining VAT-registered, even on a voluntary basis, allows businesses to maintain these benefits,” she says.
However, businesses that exit the VAT system will lose the ability to claim input VAT on purchases. Instead, VAT paid becomes part of their cost base and may only be considered when calculating taxable profits for income tax purposes.
“While this provides some relief, it does not offer the same immediate cash flow advantage as input VAT recovery,” Mutabaazi adds.
She notes that VAT registration also comes with continued compliance obligations, including monthly return filings regardless of whether a business records sales during a particular month.
“Failure to do so attracts penalties at the higher of the tax due or Shs200,000 per month,” she says. Mutabaazi welcomed the increase in the VAT threshold, describing it as a positive development for small and medium enterprises, particularly those operating in lower turnover categories.
She said the reform would reduce administrative burdens and allow businesses to focus more on growth rather than compliance requirements. However, business groups say while the adjustment is welcome, it does not go far enough.
The Kampala City Traders Association (KACITA) Uganda argues that the Shs250 million threshold remains low considering the multiple taxes and other costs faced by businesses. KACITA Chairman Isaac Sekitto said the VAT rate of 18 percent continues to increase the cost of goods and reduce competitiveness.
He proposed raising the threshold to at least Shs1 billion and reducing the VAT rate to 16 percent to align Uganda’s tax environment with regional markets.
John Walugembe, Executive Director of the Federation of Small and Medium Enterprises, said the threshold review was a step towards simplifying tax administration but warned that it does not address the wider challenges facing small businesses.
He said many SMEs continue to struggle under what he described as an aggressive and fragmented tax system that imposes multiple obligations on businesses.
According to Walugembe, a single tax reform may have limited impact when businesses continue to face several other costs and compliance demands.
The VAT threshold adjustment comes a year after the government introduced a three-year tax holiday for new enterprises with investments below Shs500 million.
The incentive, according to the Uganda Investment Authority and the Ministry of Finance, was designed to encourage formalisation and support the growth of new businesses.. “The intention is to help businesses to start and grow. We don’t want to see someone who has just started a business being approached by the Uganda Revenue Authority asking for taxes,” Finance Minister Henry Musasizi said while presenting the proposal to Parliament last year-URN. Give us feedback on this story through our email: kamwokyatimes@gmail.com
