Construction News

Fri May 29 2020

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End of the road for red diesel?

5 Mar Credible reports suggest that the tax benefit of red diesel is about to be scrapped.

Chancellor Rishi Sunak is reported to be scrapping the red diesel rebate
Chancellor Rishi Sunak is reported to be scrapping the red diesel rebate

Various national media, including the BBC and the Financial Times, have reported that new chancellor Rishi Sunak will scrap the red diesel rebate in his budget statement next week.

This will mean users of diesel powered construction machinery paying an extra 47 pence on every litre of diesel consumed.

Scrapping the rebate will generate an additional £2.4bn a year for Treasury coffers at the expense of farmers, construction companies, crane hire companies and the like.  

Red diesel is the same as regular diesel but has a dye in it to indicate that it is largely tax exempt. The rebate for gas oil has existed in one form or another since the inception of fuel duty in 1928. This was because fuel duty was intended to be a tax on motoring.

Red diesel use today makes up approximately 15% of total diesel use.

Gas oil intended for use in diesel engine road vehicles (DERV) currently has a duty rate of 57.95 pence per litre (ppl). Gas oil intended for other uses is entitled to a rebate of 46.81 pence per litre giving an effective duty rate of 11.14 pence per litre.

Part of the rationale for scrapping the rebate is that if red diesel users are paying so little for their fuel, there is little financial incentive for them to switch to cleaner technologies.

The government published a ‘call for evidence’ on the use of red diesel in 2017, so has its use firmly in its sights. The outcome of that was: “The responses from both industry and manufacturers of machinery make it clear that cost and a lack of alternatives to diesel are concerns. This is the case to a greater and lesser extent across sectors. However, the call for evidence has established that for some uses, practical alternatives to red diesel do exist. We are not setting out any specific proposals at this stage. However, government will continue to pursue policies to reduce the overall environmental impact of diesel use and encourage the uptake of alternatives in industries where a practical substitute for diesel engines is available.”

Then last year the Treasury published a report, Non-agricultural use of red diesel for non-road mobile machinery, indicating direction of travel.

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Construction Plant-hire Association chief executive Kevin Minton wrote to the chancellor yesterday expressing concern at the reports of impending red diesel restrictions.

“Restrictions on the use of red diesel in the construction sector would, unfortunately, have a profound impact for our members and the wider construction industry by raising costs and squeezing already tight profit margins,” he wrote. “This in turn will limit scope for investment in new skills and new cleaner, greener technology – something the government is encouraging our members to do.”

He continued: “Such proposals will only undermine this progress, adding greater uncertainty at a time when construction remains fragile, despite government plans to increase spending on infrastructure. We urge you to delay any consideration of this use until a proper consultation can be carried out, and suitable amelioration measures identified.”

Farmers have also been quick to react to the issue, with the National Farmers Union (NFU) speaking out.

NFU president Minette Batters said: “Red diesel is the primary fuel to run the majority of agricultural vehicles and is absolutely crucial to farm businesses and maintaining food production. The lower fuel duty on red diesel recognises this fact and, with such uncertainty and rising input costs, it is absolutely essential that the red diesel exemption is maintained.

“Changes to this duty could see farmers face increases of nearly 50p per litre, making us immediately uncompetitive with many countries, including EU member states, the US and Canada, which all provide their agricultural sectors with a lower fuel duty on red diesel.

“Removing this from British farmers would leave them at an immediate competitive disadvantage, coming at a time when farmers are already dealing with ongoing uncertainty over our future trading relationship with the EU and rest of the world.

“While agricultural vehicles have become more efficient, it is impossible for farmers to move away from using red diesel as there are currently no commercially viable alternative fuels.”

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