At Budget 2020, the government announced that from the 1st April 2022, it will remove the entitlement for most sectors to use red diesel, with the exception of agriculture, horticulture, fish farming, forestry, rail and non-commercial heating system users.
This means that any business operating outside of these sectors must use fuel that is taxed at the standard rate for white diesel. The change in legislation is needed to encourage red diesel users to ditch the diesel, as essentially, the higher the price, the higher the likelihood that businesses will opt for cleaner fuels.
Current red diesel duty
Red diesel, also known as gas oil, makes up around 15% of diesel use in the UK due to its low duty rate and is currently accountable for approximately 14 million tonnes of CO2 emissions every year.
At time of writing, red diesel has a duty rate of 11.14 pence per litre which is comparably less than the 57.95 ppl for white diesel. This rate has been in place since 2010, due to a 10-year freeze on fuel duty so it’s expected to come as a big adjustment for many businesses.
As its name implies, red diesel contains a red dye which is designed to leave behind traces in engines and pipelines so HMRC and environmental agencies can identify prohibited use. For example, when drivers have illegally used red diesel in road-going vehicles in place of white diesel to profit from the 81% discount that red diesel currently benefits from.
This means that when those who will lose their red diesel entitlement switch over to white diesel, the dye residue would be left behind. Situations such as this could potentially mislead authorities to believe that anyone who has legally bought white diesel has illegitimately used red diesel in the past.
Nonetheless, the government is not asking businesses to empty or replace their tanks ahead of the ban, due to the high costs incurred. To help combat the issue, suppliers are being asked to replace or flush out fuel tanks and pumps in anticipation of the tax changes, to help avoid red diesel remnants lingering in tanks when delivering white diesel.
However, heater suppliers are being asked to replace fuel tanks or flush out tanks and pumps before the red diesel tax changes to ensure no trace of red diesel remains when supplying white diesel. Suppliers will also be required to monitor the use of red diesel going forward and ensure that all fuel supplied to a sector that will lose entitlement uses all red diesel before this date.
The government has acknowledged that the change in red diesel eligibility will cause financial difficulties for a number of sectors so it launched a consultation period that ran between July 2020 and 1 October 2020 to give users the chance to submit their opinions on the proposed new legislation.
Responses are being evaluated and any sectors that ought to retain their entitlement will be considered, with HMRC set to publish draft legislation for consultation in 2021.
Even though this is a long way off business should be prepared for the extra costs of heating their premises will be and either change to a greener type fuel or a more efficient heating system.
