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 invoice you are fully deductible as a cost of your business.
  • The subcontractor must provide an invoice — cash payments without evidence are not deductible.
  • If you operate in the construction industry, CIS (Construction Industry Scheme) rules apply — deduct tax at source and report to HMRC.
  • Subcontractor costs reduce your taxable profit directly, unlike your own salary as a sole trader.
  • If you pay a subcontractor more than £1,000 in a year, keep their full invoice details including address and UTR/company number.

Limits

No cap — all genuine subcontractor costs with 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, reducing his taxable profit by the full amount.

Record Keeping

  • Retain all subcontractor invoices (name, address, description of work, amount)
  • Keep records of payment — bank transfer receipts or statements
  • For CIS: keep CIS deduction statements and report monthly to HMRC
  • Match invoices to client projects to demonstrate business purpose

Frequently Asked Questions

Do subcontractors need to be registered as self-employed?

For your purposes, you need their invoice and evidence of payment. Their own tax affairs are their responsibility. However, in construction CIS applies and you must verify their status with HMRC.

Can I pay subcontractors in cash?

You can, but you need a proper invoice and ideally a bank record. Cash payments without any paper trail are very difficult to support if HMRC enquires.

What if the subcontractor is also a friend or family member?

The payment must be genuinely commercial — i.e. paid at market rate for work actually done and evidenced by an invoice. HMRC scrutinises payments to connected parties.