Red diesel tax changes

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The announcement of red diesel tax changes in the budget on March 11th, 2020 sent shockwaves through the construction industry. Red diesel is chemically no different to standard clear, or ‘white’ diesel, but is coloured, or marked, for identification. It cannot be legally used for the propulsion of motor vehicles on public highways apart from a few key exceptions. Red diesel is only sold for business use in a handful of industries, for off road vehicles and machinery, heating and power generation. As a result, tax on red diesel is charged at a far lower rate than white diesel, whose tax contributes to highway maintenance.

Who uses red diesel?

Red diesel is mainly used in Agriculture, construction, rail travel, heating and generators for commercial use, along with council vehicles such as road gritters. In agriculture, farm machinery and vehicles can use it, even for minor public road use as long as it is to access farmland that is accessible no other way. This must still be within 1.5 km, travelling any further on public roads is illegal. As farmers are often called on to grit country roads inaccessible to council gritters that must prioritise heavily used roads, this is also permitted. In construction, cranes, excavators and all site plant use red diesel, along with power generators for worksites. Red diesel fuelled vehicles can travel on roads off the worksite for distances of one kilometre. Council vehicles or those used by their contractors for highway maintenance are also permitted to use red diesel, even on public roads. This includes gritters, snow ploughs, road rollers, tar sprayers and excavators, cranes and similar plant used for road repairs. If caught using red diesel illegally, your vehicle can be seized until a release fee is paid, along with any duty owed for fuel used. This can be backdated to cover the whole period red diesel was used. If the offense is considered serious enough, an unlimited fine and prison sentence of up to two years could result.

What are the planned changes and why are they being implemented?

The proposed changes to the red diesel tax rebate are part of a greater plan to reduce air pollution and reduce harmful emissions. This also included a £27 billion investment in road construction and a £304 million fund to help councils reduce nitrogen dioxide emissions. This has seen great criticism by green groups, who claim increased road transport will increase greenhouse gas emissions, adding to an estimated 40,000 premature deaths per year. From April 2022 red diesel will only be available legally to the agriculture and rail sectors and for domestic heating. For construction, the subsidised 11.14p per litre duty on red diesel will no longer exist and the standard 57.95p tax rate will then apply. The two year delay is intended to allow the industry time to adapt. The chancellor Rishi Sunak described red diesel as “a 2.4 billion tax break for pollution that’s also hindered the development of cleaner alternatives.” He also claimed “… 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.” It has been estimated that an extra £2.4 billion in taxes will be raised yearly from the red diesel tax increase. According to Treasury figures, 15% of total diesel use in the UK is from the use of red diesel. In addition, as construction contributes 9% to British GDP and employs 2.7 million workers, this has been seen as unfair scapegoating and penalisation of the construction industry.

How will this impact the construction industry?

According to Rob Oliver, CEO of the Construction Equipment Association, “The chancellor was entirely selective with his statistics … 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.” As the construction industry has no current access to lower carbon fuels or plant using alternative energy sources, choices are limited. Even the two year grace period is seen as insufficient time to adjust. Fuel prices will inevitably increase, and this cost will have to be passed on to the customer. As a result, government plans for road construction will cost the taxpayer more as contractors will have to charge more due to increased fuel costs. The cost to the industry from this move alone is estimated at £500 million per year. After a year of diminished work and delays from lockdowns and worker illness, it may well spell the end for smaller businesses. On the 6th of April 2020, the government, on the website, initiated a consultation with representatives of concerned industries. While this is now closed and its conclusions unannounced, there may yet be hope for construction.

What are the alternatives?

In response to the budget announcement, Federation of Master Builders CEO Brian Berry said of 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.” The two year ‘grace period’ may not be enough for the radical changes away from fossil fuels. However, solutions are appearing. Intelligent Energy are a fuel cell engineering company founded at Loughborough University pioneering zero emission fuel cell modules. They are pioneering inclusion of these in welfare cabins, lighting towers and portable power solutions. Other companies are now looking into gas from anaerobic digestion plants as a source of fuels. Second generation biofuels compatible with current diesel engines such as hydrogenated vegetable oils are also being explored. Despite the initial shock, it is possible that this could be the spur that the construction industry needed. Demand will always promote development of new solutions and any of these could be the answer. Only time will tell.

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