Email from accountant
Hi Dean/Judy
A business can register for the flat rate scheme of VAT if its annual turnover, excluding VAT, is less than £150,000. The rate of VAT for your business from 4 January 2011 would be 12%. This is the rate for all other businesses which were not listed as specialised by H M Revenue and Customs and is also the same percentage as the laundry and dry cleaning businesses which is in a similar sector.
An example of how the flat rate scheme would be calculated is:-
A sale of £100 net would be charged at £100 + 20% VAT, a total of £120. This is how you would raise your invoice.
When you come to complete your VAT return, you calculate the VAT based on the total VAT inclusive amount of £120 (so £120 x 12% = £14.40). This amount is payable to H M Revenue and Customs leaving you a net amount of £105.60.
There are two methods of calculating the VAT, the basic turnover method and the cash based turnover method. This means that you would either pay when the invoice is raised or when the monies are received. Given that you normally have a gap between invoicing your customers and receiving the payment from them, I believe the cash based turnover method would be better suited to your business. In this instance, you will only pay over the VAT amount when any monies are received and this should not affect your cash flow.
You cannot reclaim any input VAT on any normal purchases however you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more.
With regards to your current non commercial customers, unfortunately you will either have to pass the price increase on to your customer’s, or reduce the net price to these customers (so effectively suffer a loss in income for yourselves). One way to minimise the impact on these customers would be to increase the gross price to your customers by 13.64%, rather than adding on 20% on top. This would mean that you are still receiving the same net amount after paying over the VAT as before and the price rise would not be so substantial. An example of which would be:-
For what was previously a £100 sale, you would now charge £94.70 + 20% VAT, a total of £113.64.
You calculate the VAT based on the total VAT inclusive amount of £113.64 (so £113.64 x 12% = £13.63). This would mean that after you have paid the VAT over to H M Revenue and Customs, you would still be left with the same net amount as to what you were receiving previously and the customer has suffered a lesser price rise.
One other option would be to possibly set up the limited company now and have two sets of accounts, one with the commercial contract work and one for your domestic work. As these are two separate entities, we could keep the sole trade business below the VAT threshold so no price increase would need to be passed on to your domestic customers. However, this does come at a cost and more administration and without looking at the numbers for each, I do not know whether this would be a viable option.
If you would like to discuss any of the above or would like any further information, then please do not hesitate to contact me.
Kind regards,
James