Hmm. In your example you are absorbing part of the VAT charge to the consumer which is not how a business should operate, the math in the example is also incorrect.
As a VAT registered business You add margin to your ex VAT price, the rest is irrelevant as it's neutral. Of course the price to a non-VAT registered consumer is higher, thats you collecting tax for the government on your margin.
This is a maths question now
Adding and subtracting VAT is done in a very specific way. Adding VAT is easy, subtracting it is not as obvious. See my example below:
Lets break this down.
An item costs £10 + VAT so:
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Actual price for VAT registered business: £10
VAT of £1.75 would be reclaimed on the above from HMRC (input tax). See below.
Adding a margin:
£10 + 5 = 15 * 1.175 = £17.63 sale price.
0.88p is VAT on your margin (passed to the government). (5*1.175)-5
1.75 is VAT on your original price (which you reclaim). (10*1.175)-10
The above two amounts are output taxes.
As we can see 15+0.88+1.75 = £17.63
I hope you're still with me here...
Essentially, as well as collecting the VAT from the consumer for the amount you reclaimed you are also collecting additional VAT which is levied on your margin of £5. Either way you earn £5 net.
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Actual price for NON-VAT registered business: £11.75
Adding a margin:
£11.75 + 5 = £16.75 sale price.
No vAT is involved and your margin is £5.
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Now here is the clincher.
Try:
(VAT registered company price) - (NON-VAT registered company price)
17.63 - 16.75
You'll get 0.88 which is precisely the amount of VAT levied on your margin as a VAT registered business which you charged on to the customer.
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Hopefully this demonstrates that VAT is completely neutral for those non-believers
If you're VAT registered, as well as collecting VAT to the amount you originally reclaimed, you're collecting VAT on your margin.
Subtracting VAT is not as simple as it may appear. You cannot simply subtract 17.5% from the gross amount, the figure will be way out.
To subtract VAT use this formula:
(gross price x 7)/47
Example:
If an item costs £2.35 inc VAT - to identify the VAT element do the following:
(2.35 x 7) / 47
It gives 0.35 or 35p which is the VAT element.
Reverse it by trying 2*1.175 to add the VAT again, you'll get £2.35
