Policy paper

Fuel Duty changes for diesel used in private pleasure craft

Updated 1 July 2021

Who is likely to be affected

Users of diesel-powered private pleasure craft in Northern Ireland, and those involved in the supply of fuel to these craft in Northern Ireland (in particular operators of refuelling stations at ports, marinas and on inland waterways).

General description of the measure

This measure commences legislation included in Finance Act 2020 to prohibit users of diesel propelled private pleasure craft in Northern Ireland from using rebated diesel (red diesel) to propel their craft. This means that such craft must use full duty-paid diesel which is taxed at the full rate of fuel duty in any engine used to propel the craft. However, they can continue to use red diesel in a fuel tank that does not supply an engine that propels the boat.

The measure also introduces secondary legislation that will establish a new relief scheme so that private pleasure craft users in Northern Ireland can benefit from the lower, rebated rate of fuel duty on 40% of the full duty-paid diesel they use on boats that have a single fuel tank. This percentage reflects the amount of fuel a private pleasure craft typically uses for non-propulsion uses (such as heating and lighting the craft).

The measure was subject to a summer 2019 consultation, a response to which was published alongside Finance Bill 2020.

Policy objective

The measure is designed to implement a 2018 judgment by the Court of Justice of the European Union (CJEU) (case C-503/17). The Court ruled that it is contrary to the Fiscal Marking Directive for the UK to allow marked diesel to propel private pleasure craft, even though the user of the diesel pays their fuel supplier the duty differential between the rates for red diesel and unmarked, full duty-paid diesel on the amount of fuel used to propel their craft. Although there is now no need to implement the CJEU judgment in Great Britain as a result of leaving the EU, there is a continuing obligation to implement it in Northern Ireland as a result of the Northern Ireland Protocol.

The new relief scheme in Northern Ireland is being introduced to ensure that the average private pleasure craft user in Northern Ireland does not pay a higher rate of duty on their non-propulsion use than they do now.

Background to the measure

Historically, the UK 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 on the fuel used for non-propulsion uses). This means that, even though they are allowed to put red diesel in both their propulsion and non-propulsion fuel tanks (where they have separate tanks), in effect, the price private pleasure craft users pay for fuel that they intend to use for propulsion includes duty at the full diesel rate. The price they pay on the rest of the fuel includes duty at the red diesel rate. The way this is achieved is that, when it fills up with rebated fuel, the private pleasure craft user pays its fuel supplier the difference between the rebated and full rates of diesel on all the fuel they intend to use to propel their craft.

In 2018, the CJEU ruled that the use of red diesel to propel private pleasure craft breached the Fiscal Marking 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.

Over summer 2019, the government consulted on how it intended to implement the judgment. It proposed requiring private pleasure craft in the UK to use full duty-paid diesel for propulsion and sought evidence on the impact this would have on users of diesel-powered 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 oil (RDCOs), and users of diesel fuel to adapt to using only full duty-paid diesel for propulsion of private pleasure craft and, if needed, the length of any such period. A number of implementation challenges were identified, and the government published its response to consultation alongside publication of Finance Bill 2020.

Finance Act 2020 included legislation to make the changes needed to implement the judgment. At Budget 2020, the government announced wider reforms to red diesel entitlements to be introduced from April 2022. As these reforms will have implications for the implementation of the red diesel changes, the government announced that before it set out its detailed implementation plans relating to diesel use in private pleasure craft, it wanted to consider the impact of the wider red diesel reform through a consultation in summer 2020. Budget 2021 announced the outcome of that consultation and published a tax information and impact note.

Budget 2021 announced that the government would maintain the entitlement to use red diesel beyond April 2022 for all commercial boat operating industries, including but not limited to the fishing and inland water freight industries. The government also decided not to change the treatment of private pleasure craft in Great Britain (England, Scotland and Wales). In Northern Ireland, to achieve consistency with the 2018 CJEU judgment which continues to apply under provisions in the Northern Ireland Protocol to the Withdrawal Agreement, the government announced that private pleasure craft users will no longer be able to use red diesel for propelling their craft from later in 2021, but that a relief scheme would be introduced on fuel used for non-propulsion purposes.

In subsequently deciding on the commencement date of 1 October 2021, the government took account of discussions with Northern Ireland private pleasure craft users and their fuel suppliers. They provided compelling evidence that they would be unable to build the additional fuel supply infrastructure during the sailing season to enable full duty-paid diesel to be supplied to private pleasure craft and red diesel to be supplied to commercial craft. Introducing the changes in October 2021 gives suppliers time to get the infrastructure in place for the start of the 2022 season and avoids disruption during the 2021 season.

The tax information and impact note for this measure published at Budget 2020 has been superseded by this note.

Detailed proposal

Operative date

The measure will take effect on 1 October 2021.

Current law

The 2003 Energy Taxation Directive is 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 Fiscal Marking 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. Although the transition period following our departure from the EU ended on 31 December 2020, Northern Ireland remains obliged to comply with both the Energy Taxation and Fiscal Marking Directives under Article 8, Annex 3 of the Northern Ireland Protocol.

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.

Schedule 11 to Finance Act 2020 made changes to HODA. It amended section 12 and replaced section 14E 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. The Schedule also replaced section 14F 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. It also made consequential amendments to sections 6AB, 13ZB, 14A, 14B, 14C, 20AAA, 24 and 27 and Schedules 4 and 5, including to give HMRC powers to take samples.

Finance Act 2020 also provided for secondary legislation to mitigate the impact of the measure on residential craft. It provided for all changes relating to private pleasure craft to be brought into force on a day appointed in secondary legislation either in the UK as a whole or in part of the UK.

The Hydrocarbon Oil Regulations 1973 (SI 1973/1311) provide for general controls and definitions relating to hydrocarbon oils.

The Hydrocarbon Oil and Bioblend (Private Pleasure Flying and Private Pleasure Craft) (Payment of Rebate Etc.) Regulations 2008 (SI 2008/2599) deal 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.

Proposed revisions

The Finance Act 2020, Schedule 11 (Appointed Day) (Northern Ireland) Regulations 2021 (SI 2021/740) were made on 28 June 2021 to commence the provisions in Schedule 11 to Finance Act 2020 in Northern Ireland only, and appoint a date (29 June 2021) to enable further regulations to be made.

These regulations, known as the Hydrocarbon Oil and Biofuels (Northern Ireland Private Pleasure Craft) Regulations 2021 (SI 2021/780), were laid on 1 July 2021. They introduce a number of changes that are needed as a consequence of the new prohibition on use of red diesel in Northern Ireland. The regulations:

• establish a new relief allowing fuel suppliers to private pleasure craft in Northern Ireland who are registered for this scheme with HMRC to claim relief from fuel duty (the difference in duty between the full duty paid on the diesel they have supplied and the lower, rebated rate for red diesel) –the supplier can apply relief on 40% of the full duty-paid diesel it supplies to craft in Northern Ireland that have a single fuel tank (40% being typical of a private pleasure craft’s non-propulsion use), if it passed on the saving to the craft user at the point of sale
• require that fuel to which the relief can apply must not be landed again (removed from the fuel tank) at any place in the UK without the written consent of the Commissioners for HMRC
• specify that residential craft will not be classed as a private pleasure craft and so can continue to use red diesel:
  • in a fuel tank that does not supply an engine used to propel the craft
  • in situations, which will be very rare, where the use of the vessel is a result of an HMRC officer instructing a user to remove restricted fuel from the vessel
• make consequential changes to regulation 47 of SI 1973/1311
• disapply provisions in SI 2008/2599 that will become redundant in Northern Ireland as a result of this measure

Summary of impacts

Exchequer impact (£m)

2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
negligible	negligible	negligible	negligible	negligible	negligible

The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a later fiscal event.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

Ireland who currently use red diesel by prohibiting their use of red diesel for propulsion of their craft. These craft currently use red diesel (duty rate of 11.14 pence per litre (ppl)) but the price they pay the RDCO on the proportion of fuel they estimate they will use for propulsion includes duty at the full rate for diesel (57.95ppl). The difference between these two rates is passed on by the RDCO to HMRC. After the measure is introduced, private pleasure craft refuelling in Northern Ireland will have to use full duty-paid diesel for propulsion. Those that have a separate tank for the fuel they use for non-propulsion will be able to continue to use red diesel in that tank. However, many craft do not have the space for an additional tank and associated other equipment and the costs for installing one are estimated by private pleasure craft representative bodies at around £500.

The new relief will allow fuel suppliers to private pleasure craft in Northern Ireland to claim from HMRC relief from fuel duty on 40% of the full duty-paid diesel they supply to private pleasure craft if they passed on the saving at the point of sale to craft that have a single fuel tank. The relief will mean that for most users in Northern Ireland the effective duty rate on this fuel will be the same as it is currently.

Full duty-paid diesel incurs the 20% VAT rate rather than the 5% rate payable on red diesel. The measure could therefore have an impact on the disposable income available to individuals and their families. However, this would depend entirely on the amount of fuel they use.

Customer experience could be negatively impacted where costs increase as a result of the VAT change and there may be some initial difficulties in sourcing the correct fuels. However, the government’s decision to defer commencement of this measure until the end of the 2021 sailing season should minimise this disruption and give suppliers time to resolve any fuel supply issues.

Equalities impacts

HMRC does not hold equalities information on current users of rebated fuels but this measure is not expected to have adverse impacts on any group with protected characteristics under the Equality Act 2010.

Impact on business including civil society organisations

This measure is expected to have a negligible administrative burden impact on a small number of operators of refuelling stations at marinas, ports and inland waterways in Northern Ireland who are likely to opt to supply full duty-paid diesel either instead of, or in addition to, red diesel.

By switching to full duty-paid diesel, one-off costs will include familiarisation with the new rules and could include some operators in Northern Ireland having to install new pumps and tanks to supply both full duty-paid diesel and red diesel. It is expected that all those refuelling station operators that will incur these new costs will be RDCOs.

Fuel suppliers (including those RDCOs who start to supply full duty-paid diesel to private pleasure craft for the first time) will incur new negligible continuing costs by administering the new relief. They will need to record the amount of fuel supplied to the user, reduce the price on 40% of the fuel supplied and claim back the duty differential from HMRC on that fuel. Fuel suppliers will be able to make claims to HMRC monthly which means there will be a short-lived cash flow cost between the time the fuel is supplied and when they are reimbursed by HMRC. However, there will be continuing savings from no longer having to report to HMRC the proportion of red diesel used by private pleasure boat users for propulsion.

This measure is also expected to have a negligible impact on a small number of fuel suppliers in Northern Ireland that supply refuelling stations. One-off costs include familiarisation with the new rules and could include changing what fuel they supply to marine fuel suppliers. It is expected that there will be no continuing costs.

Customer experience could be negatively impacted in the short-term because, where suppliers in Northern Ireland choose to supply both red and full duty-paid diesel where they do not currently, they will incur up-front costs. This would be a commercial decision and, at most, it is expected that it would affect a small number of suppliers.

It is expected that there will be no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be negligible operational impacts for HMRC since fuel suppliers have collected the additional duty under the existing arrangements and paid it to HMRC. These arrangements will no longer be required in Northern Ireland but, as indicated above, fuel suppliers there will instead administer the new relief scheme and claim from HMRC the duty differential they have deducted at point of sale on 40% of the amount of full duty-paid diesel supplied to craft in Northern Ireland with a single fuel tank. HMRC will need to make minor changes to its administrative procedures in moving from the existing arrangements to dealing with relief claims from a small number of fuel suppliers in Northern Ireland.

Other impacts

The Ministry of Justice are content there will 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 will be monitored through information collected from tax returns and receipts, information from fuel suppliers when making claims for the new relief and through continuing communication with private pleasure craft representative bodies and users.

Further advice

If you have any questions about this measure, contact Michael Lyttle on Telephone: 03000 585 637 or email: michael.lyttle@hmrc.gov.uk.