From today red diesel will no longer be allowed in construction plant and machinery. What does this change mean for the industry?
What is red diesel and who uses it?
Red diesel is a commercial fuel used to power machinery, generators and non-road mobile machinery such as excavators, bulldozers, dumpers and cranes. Until now it has been taxed at a much lower rate than “white diesel” used in cars. This is because fuel duty was historically seen as a tax on road vehicles, so it was considered fair to have a lower duty on fuel for non-road machines.
The diesel is dyed red to ensure the lightly taxed fuel is not illegally put into road vehicles, either by accident or design. Other than the colour and the tax rates, both diesels are identical. But the difference in tax rates is significant. Whereas diesel for road cars is taxed at 57.95p per litre, red diesel has until now qualified for a rebate of 46.81p per litre, meaning its effective duty rate is just 11.14p per litre, nearly 47p per litre cheaper.
What is changing and why?
From today, most companies including construction firms, will no longer be eligible for the large rebate for red diesel use in plant and machinery. They will no longer be allowed to put red diesel in their machines. Red diesel has not been banned altogether because there are a limited number of exceptions for its use, including in agriculture, horticulture, fish farming, forestry, in trains and heating of non-commercial premises.
Ministers are restricting red diesel as part of their search for policies that can contribute to its target of hitting net zero by 2050.
According to the government, red diesel accounts for 15% of all the diesel used in the UK and is responsible for the production of 14 million tonnes of carbon dioxide a year. Ministers hope the change will incentivise firms to invest in greener alternatives, such as hydrotreated vegetable oil (HVO), improve the energy efficiency of their machinery or use less fuel.
Consultant Gleeds, in its latest energy and infrastructure report, said some major contractors are already switching to cleaner fuels. It points to Bam and Laing O’Rourke as two companies replacing red diesel with HVO.
But what will the short-term impact be on construction?
The near 47p extra duty per litre of diesel is expected to have a significant impact on construction costs. Gleeds estimates a cost uplift of 7% in excavation using machinery, between 4% and 5% for in situ concrete works and 2.5% to 3% for road construction.
Gleeds estimates a cost uplift of 7% in excavation using machinery
The government has previously estimated the change will increase average business fuel costs from £30,000 to £51,300 a year. However, industry leaders now calculate this has spiralled to £87,000.
The leaders of 15 construction bodies, including the Federation of Master Builders, National Federation of Builders, Home Builders Federation and Build UK, wrote to chancellor Rishi Sunak earlier this month calling in vain for a 12-month delay to the changes.
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They argue that things have moved on drastically since a Treasury-commissioned report in 2019 found that nearly two-thirds of businesses agreed they would switch to cleaner alternatives and away from red diesel.
The construction leaders said: “This report was before the covid-19 pandemic and makes assumptions that this technology is on a growth trajectory. It therefore doesn’t account for covid-19’s impacts on semiconductor shortages, which are expected to run until 2024, or the stagnation of global biofuel production, which is now at peak demand and sees HVO biodiesel priced above white diesel.”
David Savage, partner at law firm Charles Russell Speechlys, said the changes will “accelerate construction price escalation” and this will be borne by clients.
He said specialist contractors with significant plant and equipment fuel costs, such as earth-moving and groundworks contractors, will be hit particularly hard.
He said: “For these specialist subcontractors, their overall costs of operation could easily rise by 5%-6% overall as a result of this reform.”
What should the industry be doing right now to avoid falling foul of the new rules?
Firms must stop putting fresh red diesel into machines from today, as this is now illegal. Build UK, in an advice note says firms should empty their fuel tanks and refill them with white diesel before fuelling non-road vehicles and machines.
HMRC officers carrying out checks may ask for evidence that the right fuel is being used. Build UK is advising members to keep fuel purchase receipts and invoices, as well as contracts for the hire of plant and equipment, run plans and time sheets of drivers and operators.
It also advises firms to check stocks of red diesel have been run down, to identify all equipment that uses diesel, to make sure diesel suppliers are supplying the right kind of fuel and to make sure there is a schedule in place for moving over to white diesel.
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