Claiming VAT on Sub-Contractor Costs

It can be confusing to know what you can claim back VAT on when someone who does work for you recharges you for some of their costs.  This article explains how to work out when you can recover VAT and when you are not able to.

If you pay someone to do work for you and they charge you for their labour plus materials or plus their expenses, if they are not VAT registered you cannot claim back the VAT even if they provide you with a VAT invoice or receipt from their supplier to support the recharge.

A sub-contractor who is VAT registered can claim the VAT back which they have paid on their expenses or materials they have bought for the job and this reduces their own VAT bill as they are charging VAT to their customers.  If they want to recharge these costs to the contractor they must add VAT to the amount they recharge.  The sub-contractor will be claiming VAT based on the invoice or receipt from the supplier; the contractor will be claiming VAT back based on the invoice from the sub-contractor.  The sub-contractor may recharge the net amount (before VAT) of the cost or they may increase the amount they recharge to make a profit.  The recharge amount will depend on the agreement between the contractor and the sub-contractor.

It doesn't matter whether you work as a CIS sub-contractor, as a professional services company working for other companies, or as a self-employed delivery driver, any expenses you recharge to your customer must have VAT added if you are VAT registered and cannot have VAT reclaimed by either you or the contractor if you are not VAT registered.

If you use the Flat Rate Scheme for your VAT return you do not claim back VAT on any of your purchases unless they are capital assets over £2,000.  This means that if you recharge your customer for materials or expenses you will recharge the total cost and add VAT to that.