From April 2022, red diesel will be available only to agriculture and the rail sector. Users of off-highway construction machinery will have to pay an extra 46.81 pence per litre for their diesel, paying the standard tax rate of 57.95 pence per litre rather than the subsidised red diesel rate of 11.14 pence per litre.
The chancellor made the announcement in his 2020 budget statement in the House of Commons.
He described red diesel as “a £2.4bn tax break for pollution that's also hindered the development of cleaner alternatives”.
He said: “The Red Diesel scheme allows selected users to pay duty of just over 11p per litre for diesel, compared to almost 58p per litre for everyone else. But the sectors using red diesel are some of the biggest contributors to our air quality problem – emitting nearly 10% of the most noxious gases polluting the air of cities like London. This is a tax relief on nearly 14 million tonnes of carbon dioxide every year…the same as the entire population of London and Greater Manchester taking a return flight to New York.”
However, he said that he recognised the difficulties it would case, hence the two-year delay to give industry time to adjust.
Agriculture, however, is being given special treatment and will retain the red diesel rebate.
According to the Civil Engineering Contractors Association (CECA), losing the red diesel rebate could cost the UK construction industry between £280m to £490m a year.
On hearing the chancellor's announcement, CECA directior of external affairs Marie-Claude Hemming said: “While we are glad that the chancellor has listened to industry evidence that immediate implementation would have a catastrophic impact for many businesses across the construction sector, particularly our SMEs, the planned implementation period of two years will not be enough for many businesses, such as those who are on long-term frameworks with fixed pricing.
“For many of our members, there are no readily available low-carbon fuels or construction plant that use alternative sources of energy, and the impact of increased fuel costs will ultimately be passed on to customers.
“This change will also lead to a significant escalation in fuel theft, as there will be no way of distinguishing between gas oil and diesel used by road vehicles, and it is likely criminals will seek out construction plant as an easy target.
“It is to be hoped that where the government is a buyer on long term frameworks, it will look at how it can support its suppliers when we transition to the new rules. We look forward to engaging with government on this issue, to help them further understand the implication of this change for the construction sector in all parts of the UK.”
Kevin Minton, chief executive of the Construction Plant-hire Association (CPA), was equally disappointed. "This sends out totally the wrong message to the construction industry – just at the point when the chancellor announces an increase in infrastructure spending.
“Abolishing the tax relief on red diesel will undermine the government’s own plans, add unnecessary cost to projects and create doubt for many plant-hire companies already operating in a highly competitive industry. Whilst this will not come into effect for another two years, we urge the chancellor to engage now with the industry to understand how the subsidy is used and the efforts the plant-hire industry is making in adopting cleaner, greener engines and new technologies."
He added: “At a time when business investment remains weak, this move will undermine the construction sector at the point when it is meant to be upskilling, investing in new technology and planning for the future.”
Federation of Master Builders chief executive Brian Berry said: “While we understand the need to move away from red diesel in the long term, it is unfair that construction should no longer be exempt while agriculture remains so. Construction contributes 9% to GDP and employs 2.7 million people, which does not appear to be recognised by the chancellor. He must prioritise the development of a low-cost, low-carbon alternative to support SMEs of all sectors to tackle the climate crisis. Otherwise, the chancellor is giving with one hand to SMEs and taking with the other.”
Rob Oliver, chief executive of the Construction Equipment Association, which represents UK based manufacturers, said: "The chancellor was entirely selective with his statistics in suggesting that off-road red diesel users were responsible for 10% of air pollutants. Ironically, motor vehicles, as the much bigger polluters, will face no tax hike and drivers will continue to pay about 10% less for their fuel compared to the start of the year. The CEA is justifiably proud that its members have reduced harmful engine emissions by over 90%, which coupled with improved fuel consumption is a 'green' success."
He added: "Government has promised to consult on the application of this tax change and the CEA looks forward to being part of this process, particularly in support of plant hire companies and contractors who will be alongside us in delivering the promised infrastructure revolution."
However, suppliers of biofuels and alternative power systems welcomed the chancellor's move. Intelligent Energy, a fuell cell engineering company spun out of Loughborough University, sees opportunities. Sales director Lee Juby said: “The construction industry needs to scale back its use of fossil fuels and moves like the diesel tax relief being scrapped should encourage the sector to look at viable alternatives. The move will be a challenge to the construction industry. By their very nature construction sites do not have readily available power sockets. Provision of electricity at sites is usually provided by a proliferation of small portable diesel generators. Small generators have lower efficiency and lower emission controls than larger generators. They are dirty, noisy, and emit emissions which are both harmful to the environment and operators’ health. We already have several customers who service the construction industry and we are seeing more and more interest in our zero emission fuel cell modules. These modules are being integrated into applications like welfare cabins, lighting towers and portable power solutions.”