Subcontractor & freelancer costs

Conditions

• Payments to subcontractors and freelancers engaged for business work are an allowable cost. GOV.UK's self-employed expenses guidance lists 'subcontractors' as an allowable staff cost (updated November 2024). The payment is deducted as a business expense rather than going through PAYE.
• Employment status is the critical threshold. A genuine subcontractor is self-employed: they control how and when they carry out the work, bear financial risk, can send a substitute, and typically work for multiple clients. Where a working arrangement is in substance an employment relationship — for example the worker works exclusively for one client under close supervision and cannot send a substitute — HMRC may reclassify it as employment. If employment status is wrong, PAYE and employer NIC should have been operated, and an incorrect treatment creates back-tax and penalty exposure.
• IR35 (off-payroll working rules) applies where an individual provides services through their own personal service company (PSC) or intermediary. HMRC tests whether the worker would be an employee if they contracted directly with the end client. For medium and large private-sector clients and all public-sector clients, the client bears responsibility for making the employment status determination — using HMRC's Check Employment Status for Tax (CEST) tool at GOV.UK. An 'inside IR35' determination means the fee payer (client or agency) must deduct income tax and NIC before payment, reducing what the PSC receives.
• In construction, the Construction Industry Scheme (CIS) applies. Under CIS, contractors — including sole traders and limited companies paying subcontractors for construction work — must register with HMRC, verify each subcontractor's CIS registration status, and deduct a specified percentage from payments before remitting it to HMRC as an advance against the subcontractor's tax and National Insurance. The deduction rate differs depending on the subcontractor's registration status: registered subcontractors pay a lower rate than unregistered ones; subcontractors holding gross payment status have no deduction made. The current CIS rates are published on GOV.UK's CIS guidance pages — verify them there rather than relying on older figures. The full gross cost before any CIS deduction is the allowable expense for the contractor's own accounts.
• CIS applies to most construction operations — site preparation, building, alteration, repair, demolition, and installation of systems in permanent or temporary structures. Architecture, surveying, scaffolding hire without labour, and carpet fitting are outside the scheme. Non-construction businesses hiring freelance designers, developers, or other service providers are not affected by CIS.
• Employees cannot claim the cost of subcontractors or freelancers as a personal tax deduction — this is a business-level cost.

Common mistakes

• Treating a worker as self-employed when the reality of the arrangement is employment — this risks a PAYE and NIC liability, interest, and penalties if HMRC investigates.
• In construction, failing to register for CIS or to verify a subcontractor's status before making payment — HMRC can require the contractor to account for the full amount of any deduction that should have been made.
• Deducting the net payment after CIS deduction as the business expense, rather than the full gross amount — the allowable cost is the gross payment to the subcontractor.

What to keep

• Contracts or written agreements with each subcontractor or freelancer, describing the work scope and fee.
• Invoices from subcontractors or freelancers showing the services, amount, and date.
• For IR35 assessments: a record of the CEST determination and the information provided.
• For CIS: contractor registration confirmation, subcontractor verification records, monthly CIS returns submitted to HMRC, and deduction statements given to subcontractors.

Real-world example

A building contractor engages a CIS-registered electrician for £8,000 of work. The contractor verifies the registration status, deducts the applicable registered-rate CIS amount, remits it to HMRC, and gives the subcontractor a deduction statement. The contractor's allowable deduction is the full £8,000 gross cost — the CIS deduction is the subcontractor's advance payment towards their own tax bill, not a reduction in the contractor's expense.

Frequently asked

Related allowances