A bloke I worked with at a yard in Lymm set up a limited company on the advice of a bloke in the services who told him he'd save 30% on tax. That was 2019. By 2021 he had an HMRC enquiry and was paying back four years of employer's National Insurance on deemed employment income. The saving he'd imagined turned into a liability he hadn't.
The off-payroll working rules — commonly called IR35, after the original 2000 Inland Revenue press release — apply when a worker provides their services through an intermediary (usually a personal service company, or PSC — a limited company you own) but would be classed as an employee if they were working directly for the end client. When IR35 applies, the income from the contract is treated as employment income, and PAYE tax and National Insurance contributions are due.
For most HGV drivers running through a limited company, IR35 applies. That's not a guess — it's the conclusion you reach almost every time you run the employment status tests on a standard driving engagement. Understanding why matters more than being surprised by it.
The three employment status tests
HMRC uses case law and the Check Employment Status for Tax tool (CEST) to determine whether a working arrangement is employment or genuinely self-employed. The three key tests that HMRC and the courts apply are: substitution, control, and mutuality of obligation.
Substitution asks: can you send someone else to do the work in your place, without the client's approval required? If the client engaged you specifically because you're you — your card, your licence, your identity — and wouldn't accept a substitute, that points toward employment. For an HGV driver, the client often cares very much that you specifically hold the right licence, have the right CPC, have been checked against their insurance. A genuine right of substitution in that context is hard to establish.
Control asks: who directs how, when, and where the work is done? If the depot tells you to be at the gate at 06:00, follow their routing, use their procedures, and report back to their TM, the control sits with the client. That's employment. A genuinely self-employed contractor determines their own methods and works to a specified outcome — not a direction. An HGV driver following a delivery route set by the client's transport software, loading from the client's depot, under the supervision of the client's TM, is under the client's control. Almost always.
Mutuality of obligation asks: is there an ongoing obligation on the client to offer work and on you to accept it? If you turn up every week because there's always work available and you're always expected, that's a mutuality that resembles employment even if there's no formal contract. A genuine independent contractor turns up for a specific project and leaves when it's done — no ongoing expectation on either side.
For most HGV drivers working regular shifts through a PSC at a single operator or at one or two regular clients: all three tests point toward employment. You can't freely substitute. You're under the client's operational control. There's an ongoing expectation on both sides that shifts will be offered and taken.
Who determines your status after April 2021
Before April 2021, the worker's intermediary (your limited company) determined its own IR35 status. If you decided you were outside IR35 and paid yourself dividends accordingly, HMRC might disagree later — but the initial determination was yours to make.
From 6 April 2021, the off-payroll working rules shifted responsibility for status determination to the end client — but only for medium and large private sector clients. Small private sector clients still allow the contractor's intermediary to make the determination.
A client is small if it meets two of three conditions: annual turnover under £10.2 million, balance sheet total under £5.1 million, or fewer than 50 employees. Most sole traders and small haulage operations would be small. A major 3PL, a national food distributor, a large supermarket logistics operation — these are medium or large. If you're driving for them through your PSC, they're responsible for determining your IR35 status and operating PAYE if you're inside.
In practice, most medium and large operators and agencies have moved to blanket inside-IR35 determinations for driver PSCs, or they simply don't engage PSCs for operational driving roles at all anymore. The administrative overhead and the liability risk aren't worth it for them. If you've been told by an agency that they no longer work with PSCs for driving work, this is usually why.
The CEST tool and its limitations for drivers
HMRC's Check Employment Status for Tax tool is available at the HMRC website and asks a series of questions about the working arrangement. Based on your answers, it outputs a determination: inside IR35, outside IR35, or unable to determine.
The tool is useful but limited. It relies on accurate, honest answers about the actual working arrangement — not the contract wording. A contract that says 'the contractor may provide a substitute' when in reality no substitute has ever been offered or accepted doesn't carry weight in an HMRC enquiry. The tool asks about what actually happens in practice.
For driving roles, the CEST tool almost always produces an inside-IR35 result or an 'unable to determine' result, because the factual answers to the substitution and control questions almost always point toward employment. The tool is working correctly in these cases — it's telling you what the law says about the arrangement as it actually operates.
Where the tool says 'unable to determine', that's not a green light — it means the facts don't clearly resolve either way and you'd need professional advice before making a determination. HMRC will not necessarily stand behind an 'unable to determine' result if the arrangement is later challenged.
What being inside IR35 means in practice
If you're inside IR35 — whether because the end client has determined it, or because you've correctly determined it yourself — your income from that contract is treated as deemed employment income. PAYE income tax and employee National Insurance contributions come off your gross income before you receive it. Employer National Insurance is also due.
The company can still pay some legitimate expenses — genuinely business-related costs that aren't reimbursed by the client. But the classic PSC tax advantage — paying yourself a low salary and taking the rest as dividends — disappears when the income is inside IR35, because the dividend comes from the deemed employment income that's already been taxed.
This is what caught the bloke at Lymm. He was paying himself a salary of £12,000 a year and taking £40,000 in dividends. Under IR35, all £52,000 was employment income — income tax and NI due on the whole amount. His company had been paying corporation tax on the profits rather than employment taxes. HMRC's calculation of the underpaid tax, including penalties and interest going back four years, was significant. His accountant hadn't flagged the risk. He'd assumed that because other people were doing it, it was fine.
Agency routes and the umbrella option
Since April 2021, many drivers who were previously working through PSCs have moved either to PAYE directly through the agency, or to umbrella companies. I covered how umbrella companies actually work — and where the traps are — in this post on umbrella payslips. The short version: umbrella isn't self-employed, it's employment through a third-party employer, and the deductions are legitimate but often not explained clearly upfront.
From 6 April 2026, HMRC introduced further rules on PAYE liability in labour supply chains that include umbrella companies. The intent is to ensure that PAYE is operated correctly throughout the chain, and to place liability on the agency or end client if it isn't. This further reduces the appeal of complex contractor arrangements and pushes more driving work toward straightforward employment models.
If you're currently operating through a PSC and haven't reviewed your IR35 position properly, this is worth doing now — before HMRC does it for you. The review doesn't have to be done by an expensive tax advisor. HMRC's guidance on off-payroll working is published at gov.uk and is readable. The CEST tool gives you a starting point. And a one-off session with an accountant who specialises in contractor tax is cheaper than an HMRC enquiry.
The net pay question
The question most drivers actually want answered is: how much does it cost me? If I'm inside IR35, how much do I take home compared to outside IR35 or PAYE?
The honest answer is: inside IR35 through a PSC is usually worse than PAYE directly, because you've got company administration costs (accountant, Companies House filings, registered office, company bank account) on top of the same tax burden. Outside IR35 through a PSC genuinely does offer tax advantages — but most HGV driving arrangements don't qualify as genuinely outside. The gap between the two is where a lot of drivers end up in trouble: paying for a PSC structure that provides no tax advantage and carries additional compliance risk.
If you want to do agency work and want control over your working pattern, PAYE through the agency or through an umbrella might be simpler and cleaner than maintaining a PSC that doesn't give you the benefits you set it up for. That calculation is worth running with an accountant who knows the transport sector, not one who set up a dozen PSCs for people in other industries and assumes the rules are the same.
Managing driver hours compliance is at least something you can automate. ShiftOwt tracks EU 561 and WTD compliance automatically for £5.99 a month — one less thing to have to manage manually while you're dealing with the tax question.