Hiring subcontractors as a sole trader: tax, invoices and record-keeping points

Hiring subcontractors can be a sensible way to grow when you are a sole trader. You may have more work than you can handle on your own, need specialist skills for one part of a job, or want to take on bigger projects without committing to permanent staff.

But once you start paying other people, your paperwork matters more. You need to know whether the person is genuinely self-employed, what invoices you should collect, whether CIS applies, how VAT is handled, and what records HMRC may expect you to keep.

The good news is that it does not need to become complicated. With the right process, and support from an accountant for sole trader, you can keep things clean from day one.

First, make sure they are really a subcontractor

Before you agree the work, think carefully about the person’s working arrangement. A subcontractor is usually running their own business. They invoice you for completed work, may work for other clients, use their own tools or equipment where relevant, and take responsibility for how the job is delivered.

If you control their hours, provide all equipment, pay them regularly like wages, and they cannot send someone else in their place, HMRC may question whether they are really self-employed. This can create PAYE, National Insurance and employment rights issues.

This is why it is worth putting the arrangement in writing. You do not need a long legal document for every small job, but you should be clear on the scope of work, agreed price, payment terms, deadlines, who supplies materials, and who is responsible for fixing mistakes.

If you are unsure, a self-employed accountant can help you understand the tax side before the arrangement becomes messy.

Check whether CIS applies

If you work in construction, the Construction Industry Scheme is one of the biggest areas to get right. CIS can apply even if you are only a sole trader. If you pay subcontractors to carry out construction work, you may need to register as a contractor before paying them.

Under CIS, you usually need to verify the subcontractor with HMRC, apply the correct deduction rate, pay deductions to HMRC, file monthly CIS returns, and give the subcontractor a payment and deduction statement.

The usual CIS deduction rates are 20% for registered subcontractors, 30% for unregistered subcontractors, and 0% where the subcontractor has gross payment status. The deduction is generally made from the labour part of the invoice, not from VAT or qualifying materials paid for directly by the subcontractor.

This is an area where proper sole trader accountancy services can save you from late returns, wrong deductions and awkward HMRC letters.

Ask for proper invoices every time

A subcontractor invoice should be clear enough for you, your accountant and HMRC to understand what was paid and why. At a minimum, ask for:

• The subcontractor’s name, address and trading name if different.
• A unique invoice number and invoice date.
• A clear description of the work completed.
• The job location or project reference, if relevant.
• A breakdown of labour and materials where needed.
• VAT shown separately if the subcontractor is VAT registered.
• Bank details and payment terms.
• UTR and National Insurance number where CIS verification is needed.

Try not to accept vague invoices such as “work done £1,000”. If HMRC ever reviews your records, that does not explain enough. A clear invoice protects you, especially where the cost is being claimed as a business expense.

If you use accounting software, working with a certified QuickBooks accountant can help you keep invoices, payments and categories organised throughout the year rather than sorting everything at the last minute.

Keep VAT in mind

Hiring subcontractors does not automatically mean you need to register for VAT. The key point is your taxable turnover, not your profit after expenses. If your taxable turnover goes over the current £90,000 VAT registration threshold, or you expect it to do so, you need to look at VAT registration.

This catches some sole traders by surprise. For example, you may quote £12,000 for a project and pay £5,000 to subcontractors, but your turnover is still based on what you charge your customer, not just the amount left after subcontractor costs.

If you are already VAT registered, make sure you receive valid VAT invoices from VAT-registered subcontractors before reclaiming VAT. You should also be careful when pricing jobs, as VAT can affect your customer-facing price and cash flow.

For more complex situations, speaking to a VAT return accountant can help you understand what should be charged, reclaimed and reported.

Record payments properly

Whenever you pay a subcontractor, make the payment from your business bank account where possible. This creates a clear audit trail and makes bookkeeping easier.

Keep a copy of the invoice, proof of payment, related messages or quotes, and any project notes that show why the cost was needed for your business. If CIS applies, also keep verification details, deduction statements, monthly return records and evidence of deductions paid to HMRC.

HMRC requires self-employed people to keep business records for at least 5 years after the 31 January Self Assessment deadline for the relevant tax year. So, if you are dealing with subcontractors regularly, a folder of random receipts is not enough. You need records that are complete, readable and easy to match to your bank transactions.

This is where sole trader accounting support can make day-to-day life much easier.

Do not forget your Self Assessment

Subcontractor costs can usually be claimed as allowable business expenses if they are wholly and exclusively for your trade. That means they can reduce your taxable profit, but only if the cost is genuine, properly recorded and related to your business.

Your tax return should reflect your income, subcontractor costs, materials, travel, tools, software, insurance and other allowable expenses. If your records are incomplete, you may either overpay tax or claim costs you cannot support.

A self-assessment tax return accountant can help you pull the figures together correctly and avoid leaving everything until January.

Watch your cash flow

Subcontractors can help you earn more, but they also add pressure to your cash flow. You may need to pay them before your customer pays you. You may also need to set aside VAT, CIS deductions, Income Tax and National Insurance.

Before agreeing a job, build the subcontractor cost into your quote properly. Do not just think about the labour rate. Think about materials, travel, admin time, possible rework, VAT, and your own profit.

For example, if you charge a customer £3,000 and pay a subcontractor £1,200, you have not made £1,800 profit automatically. You still need to account for your other costs and tax. Clean records help you see what you are really making.

Review regular arrangements

If you use the same subcontractor every week, it is worth reviewing the arrangement from time to time. Ask yourself whether they still look genuinely self-employed. Are they working for other clients? Do they control how the work is done? Are they invoicing properly? Are you treating them like an external business rather than a member of staff?

There is nothing wrong with building trusted working relationships. Many sole traders rely on regular subcontractors. The key is making sure the paperwork, tax treatment and actual working arrangement all match.

This is where accountants for self-employed individuals can help you stay on the right side of HMRC rules without overcomplicating the way you work.

Keep your system simple

You do not need a huge finance department to manage subcontractors. You need a repeatable process.

• Before the work starts, agree the scope and check whether CIS applies.
• When the work is completed, collect a proper invoice.
• When you pay, use your business bank account.
• After payment, update your bookkeeping.
• Each month, check whether any CIS, VAT or tax records need action.

If you are approaching Making Tax Digital for Income Tax, this also becomes more important. From 2026 onwards, more sole traders are being brought into digital reporting based on qualifying income thresholds. Keeping records digitally now can make the transition much smoother.

If you want help setting this up properly, Asmat & Co provides sole trader accounting services designed to keep your tax, bookkeeping and compliance under control.

Final thoughts

Hiring subcontractors can give you more flexibility, more capacity and a better way to grow without taking on employees straight away. But you need to treat the admin seriously.

Check employment status, understand CIS if you work in construction, collect proper invoices, track VAT, keep records for the right length of time, and make sure every payment is supported by evidence.

If you want clear, practical help from chartered accountants in Slough, Asmat & Co can support you with bookkeeping, tax returns, VAT, CIS and day-to-day accounting. Get in touch today and let us help you manage your subcontractor records properly, so you can focus on getting the work done.

FAQs

Do sole traders need to register for CIS when hiring subcontractors?

You may need to register for CIS if you pay subcontractors to carry out construction work. This can apply even if you are a sole trader. If the work is outside construction, CIS may not apply, but you still need proper invoices and records.

Can I claim subcontractor payments as a business expense?

Yes, subcontractor payments can usually be claimed if they are wholly and exclusively for your business. You should keep invoices, proof of payment, contracts or messages, and any records showing what the subcontractor did.

What should a subcontractor invoice include?

A good invoice should include the subcontractor’s name, address, invoice number, date, description of work, amount charged, VAT if applicable, payment details, and a labour/materials split where needed.

How long should I keep subcontractor records?

As a self-employed sole trader, you should normally keep business records for at least 5 years after the 31 January Self Assessment deadline for the relevant tax year.

Does hiring subcontractors affect VAT registration?

Subcontractor costs do not reduce your taxable turnover for VAT registration purposes. If your taxable turnover goes over the VAT threshold, or you expect it to, you should check whether you need to register.