VAT registration thresholds for services currently at €35,000pa, increases to €37,500pa from 01/05/08 ( per the budget) This means that
- you do not have to register if turnover below threshold
- you may register if you wish even if turnover below threshold
- you must register if turnover is expected to exceed threshold in a 12 month period
Your or your wife's other pension/employment income is irrelevant in arriving at the threshold but this or any other self-employment of yours would be relevant.
If your customers are all VAT registered then any VAT you charge is recovered by them.
If, as you say the price for this contract is deemed to include VAT, i.e. that is the gross you receive, then if you register for VAT that comes out of your invoice and your real sale is the net amount. If you do not register for VAT, your sale is the gross amount. This may not make it worthwhile to register while under the threshold, especially if your VAT rate is 21% ( some services are at 21% and not 13.5% as are many others )
If you could charge the VAT on top of the contract price ( again recoverable by the customer if they are VAT registered) Then the VAT does not become a cost to you. In that instance, it sometimes makes sense to register when under the threshold, but only really if you have a lot of VATable costs which you could then recover the VAT on.
If the customer is not VAT registered then VAT charged by you is a cost to them and if you register then you have to suffer the VAT if you cannot increase your gross to compensate.
Given the amounts you mention and the initial 3 month term, and the possible , but only possible €40K in a 12 month after that, with the new registration threshold from May 08 being close to that at €37.5K, it would not seem worthwhile to get into VAT at this point.
Other posters may have other views on this.