Budget 2021 Review: What does it mean for the fuel industry?
Mon, Mar 8, 2021
The duty on fuel and the ongoing use of red diesel in the UK have been hot topic amongst many industries over the last year.
In his 2021 budget last week, Chancellor Rishi Sunak presented mixed news for the fuel industry. The good news that came out of this year’s budget announcement is that fuel duty will remain frozen at 57.95p per litre for both petrol and road diesel. However, after a consultation period, the Government have confirmed that the use of low duty red diesel will be abolished in April 2022, with exceptions including agriculture, non-commercial heating, rail and commercial boating.
So, what does the 2021 budget announcement mean and how it will affect the fuel industry as well as those large scale users of fuel?
The fuel duty news
After last year's budget announcement, when the Chancellor emphasised the importance of moving towards more sustainable fuels and reaching net-zero emissions by 2050, a fuel duty increment was expected. However, this year long-waited budget presentation was welcomed by the fuel industry and the general public as Chancellor Sunak decided to maintain the freeze on fuel duty.
During the Budget presentation, Sunak said: "To keep the cost of living low, I'm not prepared to increase the cost of a tank of fuel, so the scheduled rise in fuel duty is cancelled". This gave a sigh of relief to many industries, especially in the current economic situation. Chancellor’s decision was based on two main reasons:
- To keep people safe during the coronavirus outbreak, the government do not want to provide a reason now to travel safely in private vehicles and instead use public transport.
- To aid the economic recovery of the public and the business impacted by COVID -19. An increase in the fuel tax would have an additional impact on many already suffering businesses.
Although the tax on white diesel will remain unaffected for 2021, the government announced that the fuel duty will be considered later in the context of the UK’s commitment to reach net-zero emissions by 2050.
The red diesel reform
Last year, we covered the government’s proposed change to red diesel eligibility in the 2020 budget announcement. However, to hear the impacted industries thoughts and views, the government provided a consultation period until October last year. After careful consideration, the Chancellor and the government have decided to proceed with abolishing the use low of duty red diesel from the 1st April 2022 for many sectors, to help reduce the impact that fossil fuels have on the planet.
The reform is now published, and many businesses that use red diesel will be taxed at the standard rate for fuel to encourage industries to switch to more sustainable fuels.
Based on the consultation with industry bodies, the government has changed the original exempt industries list by adding a few sectors. This means that the industries that can still use red diesel are:
- Agriculture, forestry, horticulture and fish farming.
- Non-commercial heating
- The commercial boat operating industry
- The travelling fairground and circus industries when diesel is used for powering their machinery (including their caravans).
- Non-commercial power generation (for example hospitals and domestic homes)
- Amateur sports clubs as well as all golf courses.
What does the red diesel reform mean for the fuel suppliers and end users?
To ensure a clean transition from red to white diesel, the government has specified that from 1 April 2022, Registered Dealers in Controlled Oils will need to flush their tanks and supply lines when switching a fuel tank from red to white diesel, so there is no trace of the rebated fuel. End users that are losing their red diesel entitlement will need to make sure that they run down their existing stocks and do not purchase red diesel from 1 April 2022. Failing to comply with the new regulations will result in penalties.
However, the government have recognised that some users, such as a data centre holding a 3-day supply of red diesel in case of emergencies that may only use it for a few hours a year, would find it harder to run down their fuel supply until the 1 April 2022. The government has recognised this and provided HMRC with the ability to investigate and decide if the user can provide enough evidence that they have not built up their stocks or taken red diesel into the fuel system after the rules changed.
Renewable and low carbon fuels: Are they the future?
The government's decision to put the red diesel ban for some industries aim to motivate more businesses to improve their energy efficiency and opt for cleaner alternatives. The reform states that the government have acknowledged that the low running cost of red diesel has acted as a barrier to market for low carbon, greener fuels such as HVO and LPG.
However, as it stands, the price of such biofuels will remain more expensive than white diesel. Unless the government evaluate the taxing of these greener fuels before 2022, existing red diesel users are likely to just switch to white diesel, resulting in no environmental benefit. Maybe the government could take note of the Swedish approach, whereby making HVO completely tax-exempt, they saw a 124% increase in HVO usage.