Flat rate VAT registered company - but new client is a charity

[nckr55]

When my wife sold her business, she joined my existing Limited Company as a co-director.
The company is flat rate VAT registered, and has been providing services to multiple clients over the last 3 years.

As my wife is also looking for work as a consultant, bringing her into the company felt more efficient than setting up a separate firm.

However - her first client is a charity, who are not paying VAT. Apparently, most of their non-employees work as Sole Traders.

As I understand it, our Ltd Co. must charge VAT on all invoices - which this client will not oay (and have not budgeted for within this project).

So, I see our options as:

a) Do this work as a Sole Trader. This brings tax disadvantages on a personal tax level, and also makes my wife's directorship (and any associated income) from the Ltd Co less justifiable.
b) Set up a second, non-VAT registered company - for ongoing use with similar clients.

Given the sector my wife is operating within, the second option may be the best long term strategy, We could set up the second company with us both as Directors, and share income across the firms - I think?
The income to that non-VAT firm would not exceed the VAT registration threshold (while the existing, flat rate registered company does).

Is this an issue that anyone here has had to tackle before, and is there a straightforward way to associate or link (making one a holding company ?) the two firms?

[malvolio]

When my wife sold her business, she joined my existing Limited Company as a co-director.
The company is flat rate VAT registered, and has been providing services to multiple clients over the last 3 years.

As my wife is also looking for work as a consultant, bringing her into the company felt more efficient than setting up a separate firm.

However - her first client is a charity, who are not paying VAT. Apparently, most of their non-employees work as Sole Traders.

As I understand it, our Ltd Co. must charge VAT on all invoices - which this client will not oay (and have not budgeted for within this project).

So, I see our options as:

a) Do this work as a Sole Trader. This brings tax disadvantages on a personal tax level, and also makes my wife's directorship (and any associated income) from the Ltd Co less justifiable.
b) Set up a second, non-VAT registered company - for ongoing use with similar clients.

Given the sector my wife is operating within, the second option may be the best long term strategy, We could set up the second company with us both as Directors, and share income across the firms - I think?
The income to that non-VAT firm would not exceed the VAT registration threshold (while the existing, flat rate registered company does).

Is this an issue that anyone here has had to tackle before, and is there a straightforward way to associate or link (making one a holding company ?) the two firms?

Simple answer - discount your invoice to the charity by a percentage (16.6% ?) to offset the VAT cost... They're worried about net cost, not how it's made up.

But the second option is perhaps best; although I'm not sure you can link the two companies since the VAT threshold is worked on gross income.

Silly question, but what does your accountant suggest...?

[nckr55]

Thanks for the reply - and the discounted rate notion - I like that a lot.

Accountant suggests a second Ltd Co; I was just constructing a response to them re. any economies of scale which may be possible.

Taking the discounted rate approach: the company pays 14.5% currently. So if the offered day rate is £200, we could bill £166.66 per day = £200(ish) gross daily cost.
The client can't reclaim the VAT - but that ought not to matter. We need to pay VAT of £29. So it reduces the profitability of the work - but needs to be judged against the relative cost of the alternatives.

Plus - it appeals re. the objective of lending credence to my wife's employment in the existing business.

[Jessica@WhiteFieldTax]

Thanks for the reply - and the discounted rate notion - I like that a lot.

Accountant suggests a second Ltd Co; I was just constructing a response to them re. any economies of scale which may be possible.

Taking the discounted rate approach: the company pays 14.5% currently. So if the offered day rate is £200, we could bill £166.66 per day = £200(ish) gross daily cost.
The client can't reclaim the VAT - but that ought not to matter. We need to pay VAT of £29. So it reduces the profitability of the work - but needs to be judged against the relative cost of the alternatives.

Plus - it appeals re. the objective of lending credence to my wife's employment in the existing business.

Theres no rights and wrongs here, but IME you are thinking in the right direction. Solution needs to be one you are both happy with, its subjective rather than objective.

[sal]

Simple answer - discount your invoice to the charity by a percentage (16.6% ?) to offset the VAT cost... They're worried about net cost, not how it's made up.

But the second option is perhaps best; although I'm not sure you can link the two companies since the VAT threshold is worked on gross income.

Silly question, but what does your accountant suggest...?

WHS

Discount the invoice to the same gross as if there is no vat, you lose some income but the net figure will be still better than Sole trader.

I don't understand why you decided to both work through the same company. I hope that you are aware of the Flat rate VAT threshold and that combining your income in a single YourCo will most likely push you over it and you will have to de-register from the FRS which will reduce your net income and probably complicate your accounting.

[TheCyclingProgrammer]

I don't understand why you decided to both work through the same company. I hope that you are aware of the Flat rate VAT threshold and that combining your income in a single YourCo will most likely push you over it and you will have to de-register from the FRS which will reduce your net income and probably complicate your accounting.

Having to de-register from the FRS isn't that a big deal IMO. You say it will reduce net income (I assume you're talking about the FRS surplus or "profit") but it will also likely increase expenses and therefore the amount of irrecoverable input VAT, possibly to the point where it exceeds any FRS surplus which would mean coming off the FRS is the right thing to do regardless of the threshold.

[nckr55]

Having to de-register from the FRS isn't that a big deal IMO. You say it will reduce net income (I assume you're talking about the FRS surplus or "profit") but it will also likely increase expenses and therefore the amount of irrecoverable input VAT, possibly to the point where it exceeds any FRS surplus which would mean coming off the FRS is the right thing to do regardless of the threshold.

From HMRC: "Once you join the scheme you can stay in it until your total business income is more than £230,000."

My other half is only working 2 days/week for this new client, so we are OK on that front.

Anyway - thanks for all of the replies. We managed to negotiate the (incl VAT rate) up circa 11% (or the excl. VAT rate down 7.5%, as I may have pitched it to the client.

Lets her get on with this first contract without us feeling too disadvantaged re the VAT. Given the likelihood of her clients falling into s similar (charitable) bracket in the future, we may look to set up a separate Ltd. Co in the future.

[TheCyclingProgrammer]

From HMRC: "Once you join the scheme you can stay in it until your total business income is more than £230,000."

My other half is only working 2 days/week for this new client, so we are OK on that front.

Anyway - thanks for all of the replies. We managed to negotiate the (incl VAT rate) up circa 11% (or the excl. VAT rate down 7.5%, as I may have pitched it to the client.

Lets her get on with this first contract without us feeling too disadvantaged re the VAT. Given the likelihood of her clients falling into s similar (charitable) bracket in the future, we may look to set up a separate Ltd. Co in the future.

I wasn't referring to the mandatory turnover threshold for deregistration, I was talking about the scenario where the input VAT on your expenses exceeds the surplus you make from being on the FRS. If this happens being on the FRS will lose you money.