Can I reclaim VAT on subcontractors and freelancers?

Using subcontractors and freelancers is common across industries such as construction, marketing, and IT. These workers often charge VAT on their services, but that does not automatically mean you can reclaim it. HMRC allows VAT recovery only when certain conditions are met, and businesses must ensure invoices and contracts comply with VAT legislation.

Understanding when VAT can be reclaimed

If your business is VAT registered, you can reclaim VAT on goods and services used for business purposes. This includes services provided by subcontractors and freelancers, provided they are VAT registered and have correctly charged VAT on their invoices.

To reclaim VAT, three key conditions must be met:

1. The subcontractor or freelancer must be VAT registered and issue a valid VAT invoice.

2. The service provided must be for business use and relate to taxable (not exempt) supplies.

3. You must keep proper VAT records and include the expense in your VAT return.

If all these criteria are satisfied, the VAT charged can be reclaimed as input tax on your next VAT return.

Subcontractors and VAT registration

Not all subcontractors or freelancers are VAT registered. VAT registration is only required once a business exceeds the current VAT threshold of £90,000 in taxable turnover within 12 months. Many smaller freelancers and subcontractors operate below this limit and therefore do not charge VAT.

If a subcontractor is not VAT registered, you cannot reclaim VAT from their invoice, because no VAT has been charged. You should always check whether your subcontractors are VAT registered before agreeing rates or processing invoices.

A valid VAT invoice should show:

• The supplier’s VAT registration number

• The VAT rate applied (usually 20%)

• The total VAT charged

• A breakdown of net and gross amounts

If any of these details are missing, HMRC may reject your claim.

Reclaiming VAT in the construction industry

In the construction sector, VAT rules are more complex due to the Construction Industry Scheme (CIS) and the domestic reverse charge introduced by HMRC.

Under the domestic reverse charge, subcontractors no longer charge VAT on certain construction services when invoicing VAT-registered contractors. Instead, the contractor accounts for both the output and input VAT on their VAT return.

This means:

• The subcontractor does not add VAT to their invoice.

• The contractor must record the VAT as both output and input tax on their return.

• The overall result is no net VAT payable or reclaimable, but the transaction is still recorded for compliance.

If the subcontractor is supplying non-construction services (for example, architectural design or consultancy), the normal VAT rules apply, and the subcontractor charges VAT in the usual way.

Freelancers and VAT

Freelancers working in areas such as design, marketing, copywriting, or software development usually operate as sole traders or limited companies. If they are VAT registered, they will include VAT on their invoices, which you can reclaim if the work relates directly to your taxable business activities.

For example, if your VAT-registered marketing agency hires a freelance web developer to build a client’s website, you can reclaim the VAT charged on their invoice as input tax. However, if the work is for a personal project or an exempt business activity, you cannot reclaim the VAT.

Mixed-use or partly exempt activities

If your business undertakes both taxable and exempt activities, you may only reclaim VAT on the portion of the cost that relates to your taxable activities.

For example, a property development company that lets some commercial units (taxable) and some residential flats (exempt) can only reclaim VAT proportionally on services from subcontractors who work across both areas.

To stay compliant, you must use a fair and reasonable method of apportionment and retain evidence supporting your calculations.

Common situations and how they are treated

1. Subcontractor invoices under CIS

If a subcontractor operates under CIS and is VAT registered, they must still include VAT on their invoice (unless reverse charge applies). The VAT amount is calculated on the labour and materials before CIS deductions. The contractor can reclaim the VAT in the usual way, provided the invoice is valid and the subcontractor has not applied the reverse charge.

2. Freelancers below the VAT threshold

If a freelancer is not VAT registered, you will not see VAT on their invoice and therefore cannot reclaim anything. Their total fee is treated as a gross amount with no VAT element.

3. Overseas subcontractors

If you hire freelancers or subcontractors based outside the UK, the place of supply rules determine who accounts for VAT. In most cases, you must apply the reverse charge, where you account for VAT on your return as both input and output tax. This is common when hiring overseas consultants or remote professionals.

How to record and reclaim VAT

To reclaim VAT on subcontractor or freelancer costs, include the VAT amount as input tax in your VAT return. You must have a valid VAT invoice in your accounting records before claiming.

Your bookkeeping software should record:

• The date of the invoice

• The VAT amount

• The supplier’s VAT registration number

• A short description of the service provided

When completing your VAT return, the VAT you reclaim appears in Box 4 (input tax), while the total net cost of purchases appears in Box 7.

What you cannot reclaim

HMRC restricts VAT recovery on some types of costs, even if they are charged by a VAT-registered subcontractor or freelancer. You cannot reclaim VAT on:

• Services for non-business or personal use

• Entertainment or hospitality costs

• Certain motor expenses where the vehicle is used privately

• Work related to VAT-exempt business activities

Always review the purpose of each invoice before including it in your return.

Record keeping and compliance

HMRC requires VAT-registered businesses to keep detailed records of all transactions, including subcontractor and freelancer invoices. These records must be kept for at least six years and include both digital and paper copies.

If you use accounting software compliant with Making Tax Digital (such as Xero, QuickBooks, or Sage), ensure subcontractor invoices are entered with the correct VAT code. This helps avoid errors and ensures your VAT reclaim is processed correctly.

If HMRC audits your business, they may request copies of subcontractor invoices, proof of payment, and evidence that the services were used for business purposes. Missing or incorrect documentation can lead to VAT being disallowed.

Example of VAT reclaim in practice

A construction firm hires an electrical subcontractor for £10,000 plus £2,000 VAT. The subcontractor is VAT registered and issues a valid invoice. The firm includes £2,000 as input tax in its next VAT return and reclaims it against VAT charged on its own sales.

If the subcontractor were not VAT registered, the firm would pay £10,000 with no VAT to reclaim.

Similarly, a digital agency paying a VAT-registered freelance copywriter £1,200 plus £240 VAT can reclaim the £240, provided the work supports taxable business activities.

Seeking professional advice

VAT can become complicated when dealing with subcontractors, freelancers, or mixed-use properties. A VAT specialist or accountant can help you determine whether VAT has been charged correctly, apply the reverse charge where required, and ensure compliance with Making Tax Digital.

They can also assist with partial exemption calculations, cross-border transactions, and ensuring all VAT reclaims are properly documented.

Conclusion

You can reclaim VAT on subcontractors and freelancers if they are VAT registered, provide a valid VAT invoice, and the service relates to your business’s taxable activities. However, you cannot reclaim VAT from unregistered suppliers or on non-business expenses.

In construction, the domestic reverse charge changes how VAT is handled, while in other sectors, standard VAT rules apply. Keeping accurate records and verifying supplier details are essential to ensure your VAT reclaims are valid and compliant with HMRC rules.