The real cause of the driver shortage crisis is an obscure tax law called IR35

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The UK’s crippling shortage of HGV drivers has been created by a perfect storm of factors all coming at the same time – and causing an unprecedented supply chain crisis.

Some of the reasons are well known. Of course, Brexit and the Covid pandemic have played a major part – exacerbating an unhealthily stretched workforce to leave the supply of drivers unable to meet demand.

However, a crucial factor that seems to have been overlooked, and one that more than half the respondents to a recent Road Haulage Association (RHA) survey pinned as instrumental behind the driver shortage, were seemingly innocuous changes to tax rules covering the engagement of individuals who are not directly employed by the engager.

Historically being classified as an employee offered increased job security but also resulted in a higher tax bill for the individual as well as additional costs for the engager. Therefore, numerous haulage drivers chose to operate through their own limited company or as self-employed to benefit from lower taxes as well as the freedoms and autonomy conferred by freelancing. Engaging self-employed drivers also helped businesses lessen their own tax liability, offering greater operational flexibility.

In April 2021, the government introduced a change in the ‘off-payroll’ rules that determine whether an individual who provides their services through their own limited company for a business is designated as a contractor or deemed employee.

These rules, known as IR35, previously allowed HGV drivers to decide whether they were contractors or deemed employees, depending on the terms and conditions of their engagement.

The rule change in April forced large haulage businesses to classify for themselves whether the drivers they engaged were contractors or deemed employees. Along with that went the PAYE liability when workers became designated as deemed employees.

Faced with confusing compliance requirements, many businesses that engaged drivers decided to adopt a one-size-fits-all approach – classifying haulage drivers as employees. Many were steered towards umbrella PAYE firms.

Those drivers lost out on hundreds of pounds a week. Without the benefit of tax breaks associated with working for themselves, there has been little incentive to get behind the wheel of a lorry.

This sudden drop in pay has forced many drivers to seek new employment pastures, sucking valuable labour from the supply chain. According to the latest numbers from the RHA, the UK faces a shortfall of 100,000 HGV drivers.

It does not help that there is unfounded scepticism towards self-employment and a perception that it is exploitative.

Self-employment, when approached and applied correctly, and within a robust compliance framework, can encourage productivity and drive wealth creation. In the haulage sector particularly, businesses that are courageous enough to continue to use either limited company contractors or self-employed contractors, who stand to enjoy a larger chunk of their pay cheque and flexible work arrangements, will always attract more talent.

While businesses need a steady supply of talent to thrive, it is imperative that they understand the workings of the new tax system to fully optimise their operations.

While the current supply chain issues do not look close to resolution in the short term, it is crucial that the government helps to generate courage around the off-payroll working changes – and demonstrate to businesses that compliance is achievable and, by extension, self-employment is an attractive proposition.

Haulage drivers, particularly those operating through their own limited company or self-employed who have their own cabs and operators with smaller fleets, should not find it too difficult to conclusively demonstrate they have autonomy and should be able to reap the benefits that self-employment provides.

The self-employed worker is an indispensable cog in the UK economy and while businesses should prioritise tax compliance, the value that self-employed contractors provide should not be sacrificed.

This is a guest post by Richard Clutterbuck, a tax specialist at The Guild and Guild Freelancing, whose operatives are present on the UK’s major infrastructure projects, including Hinkley Point and Crossrail