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This publication is available at https://www.gov.uk/government/publications/fuel-duty-changes-for-diesel-used-in-private-pleasure-craft/fuel-duty-changes-for-diesel-used-in-private-pleasure-craft
Who is likely to be affected
Users of diesel propelled craft, particularly private pleasure craft, and those involved in the supply of fuel to UK craft (in particular operators of ports, marinas and inland waterway refuelling stations).
General description of the measure
This measure introduces enabling legislation in Finance Bill 2020 relating to the propulsion of private pleasure craft. Details on implementation will set out in due course. Private pleasure craft already pay white diesel rates for their propulsion, even though they are allowed to put red diesel in their tanks. Under this measure, private pleasure craft would have to use white diesel in their propulsion tanks. Craft with a separate fuel tank for domestic use on-board can continue to use red diesel for this purpose. Where craft have one tank for propulsion and heating, the government will explore options that prevent them from having to pay a higher rate of duty on their heating use than they would otherwise have to pay.
The measure was subject to a summer 2019 consultation, a response to which will be published later this year alongside government’s consultation on red diesel.
The objective of this measure is to ensure that private pleasure craft continue to pay the same duty rate they currently pay on the fuel they use for propulsion, while achieving consistency with a 2018 judgment by the Court of Justice of the European Union (CJEU) (case C-503/17) and meeting our international obligations. The court ruled that it is contrary to the Fuel Marker Directive for the UK to allow marked diesel to propel private pleasure craft, even though the user of the fuel pays their supplier the duty differential between the rates for red diesel and unmarked (white) diesel on the amount used to propel their craft.
Background to the measure
Historically the UK – along with some EU member states – has charged two rates of duty on diesel fuel: the full rate (currently 57.95 pence per litre) on road fuel and the rebated rate (currently 11.14 pence per litre) for other uses. Rebated fuel is marked with various chemicals including a red dye to enable misuse to be detected. Red diesel is used in commercial craft and in private pleasure craft. To comply with the Energy Taxation Directive, since 2007, the latter have had to pay the duty differential between the rebated and full rate for diesel, if the fuel is used to propel their craft (but not for domestic on board use).
In 2018, the CJEU ruled that the use of red diesel to propel private pleasure craft breached the Fuel Marker Directive, which is designed to ensure that any misuse of diesel crossing EU internal borders can be detected given the variation in duty treatment in member states. Following the UK’s departure from the EU, we have now entered a transition period which lasts until 31 December 2020. During the transition period we are obliged under EU law to implement the judgment or risk substantial fines.
Over summer 2019, the Government consulted on how it intended to implement the court judgment by requiring private pleasure craft to use white diesel for propulsion. The consultation sought evidence on the impact this would have on users of diesel propelled craft operating in UK inland waterways and along the coast; and on the companies that supply diesel to them. The consultation made clear that responses would be used to help determine whether a period would be required for suppliers, known as Registered Dealers in Controlled Oils (RDCOs), and users of diesel fuel to adapt to using only white diesel for propulsion of private pleasure craft and, if needed, the length of any such period.
Budget 2020 also announced a wider reform to red diesel, with a consultation to be launched later this year.
The measure would be brought into force on a day appointed in secondary legislation. Decisions on implementation will be made in due course.
The 2003 Energy Taxation Directive was designed to harmonise energy taxation across the EU to facilitate trade in the Single Market. It contains rules on the taxation of diesel, including that while rebated diesel can be used in commercial craft it cannot be used for propelling private pleasure craft (the definition for which is set out in the Directive).
The Fuel Marker Directive sets out the fiscal marking requirements for gas oils and kerosene and aims to prevent the improper use of certain hydrocarbon oils that are subject to excise duties. It provides that EU countries have to apply a fiscal marker to gas oils (including diesel) and kerosene which are exempt or relieved from excise duty. Fiscal marking consists of adding a specific chemical substance to such products. EU countries may add a national marker or colour in addition to the marker provided for by the Directive. During the transition period following our departure from the EU, the UK is obliged to comply with both the Energy Taxation and Fuel Marker Directives.
The Hydrocarbon Oil Duties Act 1979 (HODA) covers the UK law on the taxation of hydrocarbon oils, including diesel used on and off road. The main provisions for fuel used to propel private pleasure craft are currently in section 14E with penalties in section 14F. They allow red diesel to be supplied to operators of private pleasure craft for all uses but compel suppliers of the fuel to collect the additional duty on the fuel used for propulsion of private pleasure craft.
The VAT Act 1994 provides that white diesel is subject to VAT at the standard rate of 20% and deliveries of red diesel of not more than 2,300 litres for private pleasure craft qualify for the reduced VAT rate of 5%. Schedule 7A to the Act contains a reference to marked fuel used in private pleasure craft in respect of which a declaration under section 14E of HODA has been received.
The Hydrocarbon Oil and Bioblend (Private Pleasure Flying and Private Pleasure Craft) (Payment of Rebate Etc.) Regulations 2008 (S.I. 2008/2599) deals with mixtures of fuel where some is for use as a private pleasure craft and some not; the process for applying for a rebate; and requirements for declarations about the fuel.
Finance Bill 2020 will:
- amend sections 12 and 14E of HODA to disallow the rebates that apply to diesel, biodiesel and bioblend that are not used for road vehicles on the fuel used for propelling private pleasure craft. In practice such craft have not been benefiting from this rebated rate on the fuel used in propulsion as they have been paying the additional duty to ensure they pay the full rate
- replacing section14F of HODA to create new penalties for using marked fuel for propelling a private pleasure craft similar to those that exist when marked fuel is used in road vehicles
- make consequential amendments to sections 6AB, 13ZB, 14A, 14B, 14C, 20AAA, 24, and 27 and Schedules 4 and 5 of HODA. This includes giving HMRC powers to take samples
- provide for secondary legislation to mitigate the impact of the measure on permanently moored houseboats
- amend Schedule 7A to the Value Added Tax Act 1994 to provide for the removal, if necessary, of the reference to marked fuel used in private pleasure craft in respect of which a declaration has been received
- provide for the changes to be brought into force on a day appointed in secondary legislation, if necessary, and to the extent required to meet our continuing international obligations
If the changes need to be brought into force, a statutory instrument would be made and laid. If they were brought into force for the whole of the UK, S.I. 2008/2599 would be amended in due course to remove redundant references to private pleasure craft.
Summary of impacts
Exchequer impact (£m)
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The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a later fiscal event.
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure, if introduced, is expected to impact users of private pleasure craft who currently use red diesel. It would prohibit the use of red diesel unless a separate tank was used for supplying fuel for domestic use on board. Costs on crafts for installing a separate tank are estimated by their representative bodies at around £500. However, many craft do not have the space for a separate tank and associated other equipment. These craft users would have to use fuel that has had duty paid at 57.95p per litre for domestic use instead of the rebated fuel duty rate of 11.14p per litre they currently use, and VAT at 20%. Customer experience could therefore be negatively impacted given these increased costs. Where craft have one tank for propulsion and heating, the government will explore options that prevent individuals from having to pay a higher rate of duty on their heating use than they would otherwise have to pay. This measure could have an impact on the disposable income available to individuals and their families. However, this would depend entirely on their amount of fuel usage.
In 2017 Royal Yachting Association, Royal National Lifeboat Institution, British Marine, Maritime & Coastguard Agency, British Canoeing and Centre for Environment, Fisheries and Aquaculture Science commissioned Arkenford to examine the participation in watersports. Their report gives no reason to believe that any group with protected characteristics will be particularly impacted. No further report has been commissioned.
Impact on business including civil society organisations
This measure, if introduced, is expected to have a negligible administrative burden impact on approximately 400 operators of refuelling stations at marinas, ports and inland waterways.
By switching to white diesel, one-off costs would include familiarisation with the new rules and could include some operators having to install new pumps and tanks to supply both white and red diesel (although this will be affected by wider changes to red diesel announced at Budget). It is expected that there would be no ongoing costs. Ongoing savings could include not having to report to HMRC the proportion of red diesel used by private pleasure boat users for propulsion and those that opt to supply only white diesel would no longer need to be RDCOs. Some suppliers may, however, continue to supply red diesel only, because their customer base is skewed towards commercial craft that would continue to be able to use red diesel. They would not be able to supply private pleasure craft, leading to a loss of revenue and profits.
This measure, if introduced, is also expected to have a negligible impact on fewer than 100 fuel suppliers that supply refuelling stations. One-off costs would include familiarisation with the new rules and could include changing what fuel they supply to marine RDCOs. It is expected that there would be no ongoing costs.
If introduced, customer experience could be negatively impacted in the short-term because where suppliers chose to supply both fuels, they would incur up-front costs. Customer experience could see an improvement in future because business administrative burdens would be reduced, as there would be a reduction in the need to collect and report data to HMRC and collect and remit tax to HMRC.
It is expected that there would be no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
There would be no operational impacts for HMRC since RDCOs have administered the existing scheme on behalf of HMRC. RDCOs would see a reduction in their administration burden because they would not be a required to record the amount of red diesel used for propulsion of private pleasure craft and collect the duty differential compared with white diesel and pass this on to HMRC.
The Ministry of Justice are content there would be negligible extra costs on the justice system arising from any prohibition.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure would be monitored through information collected from tax returns and receipts, and through communication with affected taxpayer groups.
If you have any questions about this measure, contact Gary Satchell on Telephone: 03000 585802 or email: firstname.lastname@example.org.