Subcontractor Costs — United Kingdom Tax Rules

Claim payments made to subcontractors and freelancers you hire to deliver client work.

Claimable: Fully claimable · Tax authority: HMRC

HMRC Rules

• Payments to subcontractors who provide invoices are fully deductible as a cost of your business.
• The subcontractor must provide a proper invoice — cash payments without documented evidence are very difficult to defend.
• If you operate in the construction industry, CIS (Construction Industry Scheme) rules apply — deduct tax at source and report to HMRC monthly.
• Subcontractor costs reduce your taxable profit directly as 'cost of sales' rather than overheads.
• If you pay a subcontractor more than £1,000 in a year, retain their full invoice details including name, address, and UTR or company number.
• Payments to connected parties (spouse, family members) must be at a genuine commercial rate for the work actually performed.

Limits

No cap — all genuine subcontractor costs evidenced by invoices are fully deductible against trading income.

Worked Example

Freelance web designer Alex subcontracts a developer for £3,000 and a copywriter for £800 to complete a client project. Both invoice Alex. He claims £3,800 as subcontractor costs under 'cost of sales', reducing his taxable profit by the full amount. He retains both invoices.

Record Keeping

• Retain all subcontractor invoices (name, address, description of work, amount, date)
• Keep records of payment — bank transfer confirmations or statements
• For CIS: keep CIS deduction statements and report monthly via HMRC's CIS online service
• Match each invoice to the client project it relates to
• For connected parties, retain evidence the rate was commercially reasonable

Frequently Asked Questions

Do subcontractors need to be registered as self-employed themselves?

For your purposes, you need their invoice and proof of payment. Their own tax affairs are their responsibility. However, in the construction industry, CIS applies and you must verify their registration status with HMRC before making payments — otherwise the deduction rate is 30% instead of 20%.

Can I pay subcontractors in cash?

You can, but you need a proper invoice and ideally a bank record or signed receipt. Cash payments without any paper trail are very difficult to support if HMRC investigates. Bank transfers are strongly preferable.

What if the subcontractor is a friend or family member?

The payment must be genuinely commercial — paid at market rate for work actually done and evidenced by a proper invoice. HMRC scrutinises payments to connected parties (spouse, partner, children, siblings) and will disallow them if they appear to be income-splitting with no genuine work performed.

How do CIS deductions affect my Self Assessment?

If you operate under CIS as a subcontractor, your contractor deducts 20% from payments and pays it to HMRC. On your Self Assessment return, you declare your gross income and claim the CIS deductions suffered — HMRC credits these against your income tax bill. This often results in a refund if the deductions exceed your actual tax liability.