Uganda has made a major change to its tax system by increasing the Value Added Tax (VAT) registration threshold from Shs150 million to Shs300 million, following the VAT (Amendment) Act 2026. The new rule will take effect on July 1, 2026.
This is the first major revision of the threshold in about a decade. It signals a shift in government policy aimed at easing pressure on small businesses while allowing the Uganda Revenue Authority (URA) to focus on larger taxpayers who contribute more significantly to revenue collection.
At its core, the change reflects a simple reality; many small businesses were spending too much time and money on tax compliance, yet contributing relatively little in VAT revenue.
Under the new system, only businesses earning more than Shs300 million in taxable turnover within 12 months will be required to register for VAT.
Small and medium enterprises below this level can now operate without VAT obligations such as monthly VAT returns, EFRIS electronic invoicing requirements, and charging 18% VAT on goods and services.
For many SMEs, this brings three immediate benefits. Improved cash flow, as businesses keep more of their working capital instead of managing VAT deductions and filings. Simpler pricing, as products and services can be sold at lower prices without adding 18% VAT, making SMEs more competitive. Less paperwork, as business owners can focus more on growth activities like sales, staffing, and expansion instead of tax compliance.
While the change benefits small retailers and service providers, it creates a new challenge for SMEs that supply larger companies or government institutions.
Most corporate clients require VAT invoices so they can reclaim input tax. Businesses that are no longer VAT-registered may struggle to meet this requirement, which could affect their ability to win or retain corporate contracts.
There is also another trade-off. SMEs that exit the VAT system will no longer be able to reclaim VAT paid on their own business purchases. This can increase their operating costs if they rely heavily on taxed inputs.
To address this, the law still allows voluntary VAT registration, giving growing businesses the option to remain in the system if it makes commercial sense.
From a national perspective, the higher threshold is designed to improve efficiency in tax administration.
The Uganda Revenue Authority has been dealing with thousands of small registrants who frequently submit nil returns and generate high administrative costs while contributing little actual revenue.
By removing these from the VAT system, URA can focus more resources on medium and large taxpayers who account for the bulk of collections. This is expected to improve enforcement efficiency and strengthen overall revenue performance.
The policy also encourages formalization. Some small businesses previously avoided growth or split operations to stay below the old threshold. With a higher limit, more firms can scale up without immediate tax pressure.
As the July 1 deadline approaches, SMEs should take a few practical steps.
Businesses should assess whether they are approaching or exceeding the Shs300 million threshold over a 12-month period. Firms selling mainly to individuals may benefit from deregistration, while those serving corporate clients may prefer to remain VAT-registered. URA is expected to provide guidance, but businesses should already begin adjusting their accounting systems and pricing structures. Proper bookkeeping and digital accounting systems will make it easier to track turnover and stay compliant as businesses grow.
The increase of the VAT threshold to Shs300 million is a significant step toward simplifying Uganda’s tax system for small businesses.
It reduces compliance pressure, improves cash flow, and allows SMEs to focus more on growth than administration. At the same time, it encourages smarter decision-making, especially for businesses operating in corporate supply chains.
Ultimately, the reform reflects a broader shift in policy: supporting small businesses not by over-regulating them, but by giving them space to grow into stronger, more competitive enterprises.
For Uganda’s SME sector, the message is clear;growth is becoming easier, but strategy matters more than ever.
