Categories: a-port-information, BusinessPublished On: 17.01.20223290 words16.5 min read

HM Revenue and Customs

Policy paper

Reform of red diesel and other rebated fuels entitlement

Who is likely to be affected

Businesses and individuals currently entitled to supply or use rebated gas oil (red diesel) and rebated biofuels.

General description of the measure

This measure introduces legislative changes through Finance Bill 2021 and subsequent secondary legislation to restrict the entitlement to use red diesel and rebated biofuels from April 2022 to the following qualifying purposes:

  • for vehicles and machinery used in agriculture, horticulture, fish farming and forestry. This includes allowing vehicles used for agriculture to be used for cutting verges and hedges, snow clearance and gritting roads
  • to propel passenger, freight or maintenance vehicles designed to run on rail tracks
  • for heating and electricity generation in non-commercial premises – this includes the heating of homes and buildings such as places of worship, hospitals and townhalls; off-grid power generation; and non-propulsion uses on permanently-moored houseboats
  • for maintaining community amateur sports clubs as well as golf courses (including activities such as ground maintenance, and the heating and lighting of clubhouses, changing rooms etc.)
  • as fuel for all marine craft refuelling and operating in the UK (including fishing and water freight industries), except for propelling private pleasure craft in Northern Ireland
  • for powering the machinery (including caravans) of travelling fairs and circuses

The measure will also extend fuel duty to biodiesel, bioblends and fuel substitutes used in heating, applying the rebated duty rate to non-commercial heating and the full rate of duty to commercial heating. Consequential changes to covering penalties for contravening restrictions on the use of rebated fuels will also be made. The legislation will provide for secondary legislation to enable HMRC to disapply its powers to seize vehicles or other machinery in certain circumstances.

Registered fuel suppliers that switch a fuel tank from red to white diesel will need to flush out the tank and supply lines until no trace of marked rebated fuel remains. This will help to ensure compliance and minimise the risk that white diesel that has had the full duty rate paid on it is contaminated with the red diesel marker.

Policy objective

In June 2019, the UK became the first major economy in the world to pass laws guaranteeing an end to its contribution to global warming by 2050. The target will require the UK to bring all greenhouse gas emissions to net zero by 2050, compared with the previous target of at least an 80% reduction from 1990 levels. The government also launched in 2019 an ambitious new strategy to clean up the air and save lives, given air pollution is one of the biggest continuing threats to public health in the UK.

Red diesel is diesel used mainly for off-road purposes, such as to power bulldozers and cranes used in the construction industry, or to power drills for oil extraction. It accounts for around 15% of all the diesel used in the UK and is responsible for the production of nearly 14 million tonnes of carbon dioxide a year. Red diesel used in the construction and infrastructure building sectors was also estimated to have caused 7% of nitrogen oxide emissions and 8% of PM10 emissions (a type of particulate matter) in London in 2018.

At Budget 2020, the government therefore announced that it would remove the entitlement to use red diesel and rebated biodiesel from most sectors from April 2022 to help meet its climate change and air quality targets. The tax changes will ensure that most users of red diesel use fuel taxed at the standard rate for diesel from April 2022, like motorists, which more fairly reflects the harmful impact of the emissions they produce. Removing most red diesel entitlements will also help to ensure that the tax system incentivises users of polluting fuels like diesel to improve the energy efficiency of their vehicles and machinery, invest in cleaner alternatives, or just use less fuel.

Background to the measure

Motor and heating fuels are liable to fuel duty, with only fuel taxed at the full rate of fuel duty allowed to be used in road vehicles. Some oils and fuels are taxed at a lower (rebated) rate – historically because fuel duty was intended to be a tax on road vehicles. This includes gas oil (diesel), which is chemically marked and dyed to enable law enforcement agencies to identify it as rebated fuel and detect when the wrong sort of diesel is being used, providing a deterrent to fuel fraud. The colour of the dye means this fuel is called ‘red diesel’. Gas oil intended for use in diesel engine road vehicles, otherwise known as ‘white diesel’ (because it has no marker or dye), has a fuel duty rate of 57.95 pence per litre (ppl). Red diesel is entitled to a rebate of 46.81ppl, giving it an effective duty rate of 11.14ppl.

At Budget 2020 the government announced that it was removing entitlement to use red diesel from most sectors, except for agriculture (as well as horticulture, forestry and fish farming), rail and non-commercial heating, from 1 April 2022.

The government consulted last summer to ensure that it had not overlooked any exceptional reasons why other sectors should be allowed to continue to use red diesel beyond April 2022. The outcome of this consultation is set out in the summary of responses to the consultation that has been published alongside Budget 2021.

At Budget 2021, the government announced its decision not to change the treatment of private pleasure craft in Great Britain, where they will continue to be able to use red diesel and pay their fuel supplier the difference between the red diesel rate and that for white diesel on the proportion they intend to use for propulsion. The government response to the summer 2020 consultation also announced that from no later than June this year private pleasure craft in Northern Ireland will have to use white diesel to propel their craft. This will achieve consistency with the 2019 judgment by the Court of Justice of the European Union and ensure the UK meets its international obligations under the terms of the Northern Ireland Protocol to the Withdrawal Agreement. It will also align with fuel use by private pleasure craft in the Republic of Ireland, which should make it simpler for private pleasure craft users to access the fuel they need if they sail between Northern Ireland and the Republic of Ireland (and vice versa).

Alongside that change, the government will introduce a new relief scheme under which private pleasure craft users in Northern Ireland will be able to claim a relief for the proportion of their fuel that will be used for non-propulsion, meaning they will not pay a higher rate of duty than they currently do on this fuel. The changes relating to the taxation of diesel used in private pleasure craft in Northern Ireland will be enacted in separate legislation and a Tax Information and Impact Note (TIIN) will be published for that measure alongside secondary legislation.

Detailed proposal

Operative date

The measure will have effect in relation to any red diesel used from 1 April 2022.

Current law

The Hydrocarbon Oil Duties Act 1979 (HODA) is the UK primary legislation on the taxation of hydrocarbon oils, including defining the different types of oils, excise duty charge, the rebate for heavy oils and associated penalties for misuse of rebated oils. It provides a rebate on heavy oils but this rebate is not allowed for any oil that will be used as fuel for a ‘road vehicle’.

Road vehicles are defined as any vehicle constructed or designed for use on roads, other than any ‘excepted vehicles’. They are currently not allowed to use red diesel and rebated biodiesel in any circumstances, unless they are ‘excepted vehicles’ as defined in Schedule 1 to the Act. These excepted vehicles include various agricultural vehicles and specialist vehicles, such as those used in construction, subject to particular conditions on their specification and use. Road vehicles that are not excepted vehicles must use fully duty paid petrol or diesel at all times.

Biodiesel, bioblends and fuel substitutes are subject to duty if set aside for a chargeable use and rebates are provided for in specified circumstances. However, heating is not a chargeable use for these fuels.

The current duty treatment for heavy oils, biodiesel and bioblends is as follows (all rates shown in ppl):

Non-rebated

Generally when used in road vehicles
Gas oil (diesel) 57.95
Fuel oil 57.95
Heavy oil other than gas oil and fuel oil (kerosene) 57.95
Heavy oil other than gas oil and fuel oil (excluding kerosene) 57.95
Biodiesel 57.95
Biodiesel blended with gas oil (bioblend) 57.95

Rebated

Used in an excepted vehicle or other off-road engine Used in heating
Gas oil (diesel) 11.14 11.14
Fuel oil 10.70 10.70
Heavy oil other than gas oil and fuel oil (kerosene) 11.14 (requires HMRC approval and repayment of the rebate prior to use) 0.00
Heavy oil other than gas oil and fuel oil (excluding kerosene) 11.14 11.14
Biodiesel 11.14 Not chargeable use
Biodiesel blended with gas oil (bioblend) 11.14 11.14

Finance Act 2020 made changes to HODA which have not yet been commenced. It amended sections 12 and 14E to disallow the rebates that apply to diesel, biodiesel and bioblend that are not used for road vehicles on the fuel used for propelling private pleasure craft. It replaced section 14F to create new penalties for using marked fuel for propelling a private pleasure craft similar to those that exist when marked fuel is used in road vehicles. It also made consequential amendments to sections 6AB, 13ZB, 14A, 14B, 14C, 20AAA, 24 and 27 and Schedules 4 and 5, including to give HMRC powers to take samples. Finance Act 2020 provided for all changes relating to private pleasure craft to be brought into force on a day appointed in secondary legislation either in the UK as a whole or in a more limited area of the UK.

There is extensive secondary legislation relating to fuel duty, with around 15 statutory instruments which are relevant to rebated fuels.

Proposed revisions

Finance Bill 2021 will amend HODA to make the changes outlined below:

  • changes will be made to sections 12 and 27 to replace references to ‘road vehicles’ with references to ‘excepted machines’. A new Schedule 1A will replace Schedule 1 and this will specify which vehicles and machines are ‘excepted machines’. These machines will be defined by reference to the type of machine and the purposes for which they are being used. Only ‘excepted machines’ will be able to use red diesel and rebated biodiesel. Numerous references to road vehicles throughout HODA will be amended so that they apply instead to ‘excepted machines’
  • changes will be made to sections 6AA and 6A to make heating a chargeable use for biodiesel, bioblends and other fuel substitutes and provide for rebated rates when used in non-commercial heating
  • changes will be made to sections 13, 13ZB, 13AA, 13AB, and 14A to 14D to update the legislation covering restrictions on use of rebated fuels and penalties for contravening these restrictions, so that the restrictions and penalties can apply where necessary following the changes in entitlement to use these fuels
  • consequential amendments will be made to other sections and Schedules of HODA.

In relation to private pleasure craft, Finance Bill 2021 provides for alternative changes to be made to some of the sections amended by Finance Act 2020, depending on whether those amendments have been commenced by the time the Finance Bill comes into force.

The legislation provides that Treasury may make regulations to cover, among other things, transitional provisions. Regulations under this power will enable HMRC to disapply seizure powers where a vehicle or machine is one which has lost entitlement as a result of the change of legislation and certain conditions are met. The fuel remaining in the vehicle, machine, appliance or heating system must have been taken in for a permitted purpose before a change of law (and still being used for the same purpose); and residual traces of marker remaining must be from legitimate fuelling and use before the change of law.

The duty position after these changes will be as follows (all rates shown in ppl):

Non-rebated

When used in non-excepted vehicles and machines
Gas oil (diesel) 57.95
Fuel oil 57.95
Heavy oil other than gas oil and fuel oil (kerosene) 57.95
Heavy oil other than gas oil and fuel oil (excluding kerosene) 57.95
Biodiesel 57.95
Biodiesel blended with gas oil (bioblend) 57.95

Rebated

Used in an excepted vehicle, machine or appliance, other than for heating Used in an excepted heating machine
Gas oil (diesel) 11.14 11.14
Fuel oil 10.70 10.70
Heavy oil other than gas oil and fuel oil (kerosene) 11.14 (requires HMRC approval and repayment of the rebate prior to use) 0.00
Heavy oil other than gas oil and fuel oil (excluding kerosene ) 11.14 11.14
Biodiesel 11.14 11.14
Biodiesel blended with gas oil (bioblend) 11.14 11.14

Secondary legislation will be laid before Parliament in early 2022 to make the necessary consequential amendments to the relevant statutory instruments referred to above.

Summary of impacts

Exchequer impact (£m)

2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026
+10 +1,405 1,425 +1,395 +1,510

These figures are set out in Table 2.2 of Budget 2021 as “Red Diesel: remove relief for sectors other than rail, home heating and agriculture” and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020.

2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026
-80 -85 -100 -110

These figures are set out in Table 2.1 of Budget 2021 as “Red diesel exemptions” and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

The impact of this measure on individuals or households is expected to be minimal because where the government felt that removing entitlements could materially impact on the prices of goods and services households consume (such as heating or sports), entitlement to use red diesel has been maintained.

If individuals or households consume red diesel directly and are not covered by the continued entitlements, they will face increased costs which could impact individuals and their families as they may have less disposable income. Some individuals could be more affected than others depending on their income levels and family circumstances – this will depend on their fuel usage.

Customer experience of those affected by this measure could be negatively impacted where costs increase.

Equalities impacts

HMRC does not hold equalities information on current users of rebated fuels but no equality impacts were raised as part of the consultation, so this measure is not expected to have adverse impacts on any groups sharing protected characteristics under the Equality Act 2010.C

Impact on business including civil society organisations

This measure is expected to have a negligible administrative impact on those businesses and civil society organisations that will lose their entitlement to use red diesel and will need to switch to white diesel, although it will increase their fuel costs. This will include sectors, for example, such as construction, mining and quarrying, ports, manufacturing (e.g. ceramics, steel, timber), haulage (for transport refrigeration units on lorries), road maintenance, airport operations, oil and gas extraction, plant hire, logistics and waste management. Whilst these businesses will need to pay the full duty rate for using white diesel, this measure is expected to incentivise these rebated fuel users to seek to use greener alternatives or use less fuel.

One-off costs will include familiarisation with the changes for those sectors no longer entitled, including costs in running down or removing red diesel and rebated biofuels from vehicles, machinery and storage tanks, and possibly from selling back any excess red diesel stock to fuel suppliers. There are also likely to be costs associated with sourcing other alternative fuels for those sectors no longer allowed to use rebated fuels.

There will be other one-off costs for some fuel suppliers (Registered Dealers in Controlled Oils or RDCOs) who will no longer have customers to sell red diesel fuel to and will therefore need to decommission fuel tanks currently storing red diesel or flush out these tanks if being reallocated for white diesel to ensure compliance. However, the government anticipates that many fuel suppliers will continue to sell red diesel and white diesel to customers. These fuel suppliers could see a continuing saving as they will need to record information for fewer rebated fuel users.

There are not expected to be any continuing costs.

Customer experience could be negatively impacted in the short-term given the work businesses and civil society organisations will need to undertake to switch to white diesel.  Customer experience could see an improvement in future because business administrative burdens would be reduced for fuel suppliers, as there would be a reduction in the need to collect and report data to HMRC and collect and remit tax to HMRC.

HMRC will aim to reduce some of these familiarisation costs by carrying out further pre-implementation publicity to make businesses aware of the changes, including providing guidance to support businesses to ensure they comply with the new rules. HMRC will also allow some latitude to businesses during the transition to help them. So that businesses can use up red diesel taken in before the change, for example, HMRC will have the ability to disapply the liability to seizure of fuel where they can be satisfied that the user has not taken red diesel into the fuel system after the change in rules for usage.

Operational impact (£m) (HMRC or other)

There are no significant operational impacts for HMRC. The reduction in legitimate red diesel usage by around three quarters should reduce the level of illegitimate use of red diesel overall because it will be harder to obtain this for deliberate misuse in road vehicles. This measure may lead to a switch between different fuel frauds, in which case HMRC will reprioritise existing resources.

The changes to HMRC processes, systems and websites as a result of this measure will be negligible.

It is possible that this measure may initially lead to a small increase in the number of appeals to tax and duty tribunals. Although the existing criminal offences and civil penalties for misuse of rebated fuels will remain largely unchanged, as fewer people will now be able to use rebated fuels, more people could commit an offence or become liable to a civil penalty and might appeal this penalty or the seizure of any fuels by HMRC. As the supply of rebated fuels will remain strictly controlled, there is likely to be only a small impact, most likely just after the change in entitlement to use rebated fuels comes into effect.

The supply of rebated fuels is restricted to businesses in the RDCO scheme. There are currently around 3,000 such businesses in the UK. There could be some more tribunal appeals if businesses that commit a criminal offence or receive a civil penalty have their RDCO status removed and appeal against this, though numbers are likely to be very small.

Other impacts

Removing most red diesel entitlements will help to ensure that the tax system incentivises users of polluting fuels like diesel to improve the energy efficiency of their vehicles and machinery, invest in cleaner alternatives, or just use less fuel. These tax changes should therefore have a positive impact on carbon emissions and air quality.

The Ministry of Justice are content there would be negligible extra costs on the justice system arising from any prohibition.

Other impacts have been considered and none has been identified.

Monitoring and evaluation

This measure will be monitored through information collected from fuel duty receipts of red diesel and white diesel, which will help to evaluate trends in fuel usage, and by communicating with affected sectors no longer entitled to use these rebated fuels as well as developers of greener alternatives.

Further advice

Read guidance about changes to rebated fuel entitlements from 1 April 2022 for more information. If you have any questions about these changes, contact the Red Diesel Entitlement Policy Team by email: [email protected].

Topic: Reform of red diesel