Who is likely to be affected
Businesses and individuals that currently supply or use rebated diesel and biofuels, including marked oils.
General description of the measure
This measure introduces technical amendments to the changes being introduced to restrict the entitlement to use rebated (red) diesel and biofuels, including marked oils, from 1 April 2022, which was legislated for in Finance Act 2021. The changes will address the following:
- altering the circumstances in which the use of rebated diesel and biofuels, including marked oils, will be permitted after 1 April 2022, including provisions aimed at transition to the new rules
- amending definitions relating to certain vehicles, machines and appliances, and to travelling fairs and circuses which are being allowed to continue to use rebated diesel and biofuels after 1 April 2022
At Budget 2020, the government announced that it would remove the entitlement to use rebated diesel and biofuels from most sectors from April 2022 to help meet its climate change and air quality targets. These tax changes will ensure that most users of rebated 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. Restricting use of rebated diesel and biofuels, including marked oils, 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.
Following consultation in 2020, the sectors that will be allowed to continue to use rebated diesel and biofuels beyond April 2022 were confirmed at Spring Budget 2021, with the changes legislated for in Finance Act 2021. This measure makes technical corrections in relation to the operation and implementation of the new rules to ensure the policy works as intended.
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 in the UK means this fuel is called ‘red diesel’ (though marked fuel from other countries may be marked with a different colour). 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). Rebated 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 rebated 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 on these changes in summer 2020 to ensure that it had not overlooked any exceptional reasons why other sectors should be allowed to continue to use these fuels beyond April 2022.
At Spring Budget 2021, the government announced the final policy design of the changes, as set out in the summary of responses to the consultation. This included restricting the use of rebated diesel and biofuels from 1 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 premises used for non-commercial purposes. This includes: the heating of homes and buildings such as places of worship, hospitals and townhalls; and electricity generation for homes and other premises being used for non-commercial purposes
- for maintaining golf courses and community amateur sports clubs (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 of travelling fairs and travelling circuses (including providing heat and electricity for caravans used by them)
The changes will also extend fuel duty to biodiesel, bioblends and fuel substitutes used for heating, applying the rebated duty rate to non-commercial heating and the full rate of duty to commercial heating.
A tax information and impact note (TIIN) for this measure was published at Spring Budget 2021 to accompany the changes included in Finance Act 2021. It is available here.
The measure will have effect in relation to any rebated diesel and biofuels, including marked oils, used from 1 April 2022.
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. Section 12 provides for where a rebate is not allowed, and where use and taking in of rebated heavy oil is not permitted, and section 24A provides where marked oil may not be used and for penalties for misuse of marked oil. Schedule 1 sets out which vehicles are ‘excepted vehicles’.
Finance Act 2021 made changes to HODA, including introducing a new Schedule 1A of HODA to replace Schedule 1, specifying which vehicles, vessels, machines and appliances are ‘excepted machines’.
There is extensive secondary legislation relating to fuel duty, with around 15 statutory instruments which are relevant to rebated fuels.
Finance Bill 2021-22 will amend HODA, Finance Act 2020 and Finance Act 2021 and provide powers for regulations to be made. The changes to HODA include:
- changes to sections 12, 13 and 24A to adjust the specific circumstances where use of rebated diesel and biofuels, including marked oils, will be allowed after 1 April 2022, including specifying the penalties that apply for contravening restrictions. In summary, it will be unlawful, from 1 April 2022, to put rebated heavy oil in non-excepted machines, and to use rebated heavy oil and marked oil in non-excepted machines, unless:
- HMRC has licensed the user to use rebated fuel and the user has repaid the rebated amount, or
- the taking in of the fuel is lawful in the jurisdiction in which it was taken in
- changes to section 14E as it extends to Northern Ireland to adjust provisions relating to private pleasure craft to reflect circumstances where the craft is refuelled in Northern Ireland before 1 October 2021 and in Great Britain at any time
- changes to section 14F as it extends to England and Wales and to Scotland to adjust provisions to private pleasure craft so that forfeiture provisions will apply where rebated diesel and biofuels are used for propulsion
- changes to paragraph 2(2) and 2(5)(c) and (d) of Schedule 1A to adjust the definition applied to agricultural vehicles and when they may use rebated fuel. This will allow agricultural vehicles which are used for the purposes of agriculture, horticulture, fish farming and forestry, to use rebated fuel for any other activities on the land where they are kept to be used for those purposes. This will also require vehicles, other than tractors and light, single-seat off-road vehicles, to have either built-in or permanently attached machinery for handling or processing agricultural produce or materials to qualify as an agricultural vehicle
- changes to paragraph 3(1) of Schedule 1A to allow the use of rebated fuel when a special vehicle is travelling to or from a golf course or land maintained by a community amateur sports club where it will be or has been used
- changes to paragraph 6 of Schedule 1A so that private pleasure craft in Great Britain will not be excepted machines, as they are covered by section 14E and 14F changes to paragraph 8(1) of Schedule 1A to adjust the permitted uses of machines or appliances which are kept on land used for agriculture, horticulture, fish farming and forestry purposes. This will enable them to use rebated fuel for activities not related to those purposes on the same land
- changes to definitions in paragraph 9(3) of Schedule 1A so that a travelling fair or travelling circus will have to demonstrate its equipment can be fully dismantled once a year and is transportable to other sites to qualify to use rebated fuel
- other minor technical and consequential amendments to HODA and omissions from Finance Act 2021
Secondary legislation will be laid before Parliament in early 2022 to supplement the Finance Act 2021 and the Finance Bill 2021-22 provisions, including making the necessary consequential amendments to relevant statutory instruments.
Summary of impacts
Exchequer impact (£m)
|2021 to 2022
|2022 to 2023
|2023 to 2024
|2024 to 2025
|2025 to 2026
|2026 to 2027
This measure is not expected to have an Exchequer impact. This measure supports the Exchequer in its commitment to protect revenue. The Exchequer impacts for the reforms to the tax treatment of rebated diesel and biofuels are already identified here.
This measure is not expected to have any significant macroeconomic impacts.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
This measure is not expected to have an impact on individuals, households or families beyond those already identified here for the reforms to the tax treatment of rebated diesel and biofuels.
This measure is not expected to have adverse impacts on any groups sharing protected characteristics under the Equality Act 2010.
Impact on business including civil society organisations
Under the extension of the existing licensing scheme, businesses who are unable to use fully duty-paid fuel due to exceptional circumstances will be able to apply for a licence and, if approved to use rebated fuel, pay the additional duty upfront. An estimated 20 businesses or fewer, mainly from the energy sector, are likely to be impacted by this approach. One-off costs will include familiarisation with the process of applying for a licence to use rebated fuel after April 2022. There are not expected to be any continuing costs. There may be further one-off costs for a small number of businesses in terms of administration related to applying for a licence, and continuing costs in submitting annual returns.
Customer experience for a small number of businesses may see an improvement as this approach will allow those businesses with exceptional circumstances (e.g. unable to use fully duty-paid diesel) the option of using rebated fuel after the new rules have been implemented.
This measure is expected to have a negligible impact on businesses and civil society organisations beyond those already identified here for the reforms to the tax treatment of rebated diesel and biofuels.
Operational impact (£m) (HMRC or other)
Under the extension of the existing licensing scheme, HMRC will need to deal with applications for licences and, where they approve applications, collect duty upfront. Otherwise, this measure is not expected to have any operational impact beyond those already identified here for the reforms to the tax treatment of rebated diesel and biofuels.
Other impacts beyond those already identified here for the reforms to the tax treatment of rebated diesel and biofuels have been considered and none has been identified.
Monitoring and evaluation
This measure will be monitored through information collected from fuel duty receipts of rebated diesel and fully duty-paid diesel and by communicating with affected sectors no longer entitled to use rebated fuels as well as developers of greener alternatives.
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@example.com.