A number of UK papers ran a story yesterday which claimed that the “rebate” on Red Diesel would be scrapped at the budget on Wednesday of next week.
This would mean an immediate increase of around 47p per litre on a product that is used in farm equipment, construction equipment, many industrial processes and industrial heating systems. With the current market price this could mean an increase of up to 80%.
I have had any number of phone calls since this story broke asking me if it is true and what customers can do. As I don’t work in Her Majesty’s Treasury, clearly the honest answer is I don’t know what they are really planning, but my reading of the economics and politics are that I can see a significant increase in duty, 8p – 10p per litre being added to Red Diesel in the budget, although I suspect that it may be delayed until later in the year, my best guess is September.
If you want to understand my rationale, please read the detail below, but if not, my suggestion is that as I can’t see the duty level remaining where it is, it would seem prudent to fill any tanks before Wednesday – not forgetting that the duty is charged at point of delivery, so just in case the rise comes into effect at midnight after the budget (which is what usually happens), make sure the fuel has been actually delivered and invoiced by Wednesday of next week. I also expect a smaller rise in Petrol and Diesel duty, maybe 4-5 p per litre, which will probably come into effect at midnight on Wednesday, so I would be very tempted to fill up your car at your local station.
How did I reach this conclusion? Well, the story in the Times felt very much like a classic “softening up” move. Create a high level of concern of a major tax rise, then make the rise much lower than expected, but still a big rise in real terms. This has been done over and over again by various Governments to get unpopular tax rises through.
The reality of a price increase of 80% would be catastrophic for farmers, but also for a wide range of UK businesses who use the fuel for off-road plant equipment, power generation and various industrial processes. Whilst farming may be lower down the political pecking order than some other industries like Financial Services, I can’t really believe that the Government would inflict that sort of hit out of the blue – aside from the risks to the industries involved, the risk of direct action from farmers and others to protest must be very high. Whilst we may not be quite so quick as a nation to protest as our friends in France, this sort of tax rise would run the risk of fuel refineries (only 6 in the UK) being surrounded by tractors and muck spreaders. Whilst it may be that some within the Treasury are too young to remember the fuel protests of 20 years ago, there must be some that can!
Why would the Government look to raise this particular taxes for Red Diesel? To understand this, it is important to understand how fuel is taxed in the UK today. We have three main liquid fuels, Kerosene (Heating Oil) which is mainly used in domestic heating (and is the basis for aviation fuel). It carries zero duty, and for most customers, 5% VAT. Next is Red Diesel (Gas Oil), used for off-road equipment and carries duty at 11.14p per litre duty plus VAT, finally White Diesel (DERV) which is for road-going vehicles and carries 57.95p per litre duty, which is the same as petrol – both carry VAT on the duty…
There are two main arguments put forward for raising the duty levels on the two types of Diesel:
1. Inflation – Since 2010 inflation has significantly reduced the real cost of the duty, indeed in real terms, we pay around two-thirds of the duty on both fuels that we did in 2010 – whilst it may not feel like that, and plenty of people will point out that the UK duty rates are higher than other Western EU countries and much higher than many further east, the fact remains that the real cost has reduced over the last decade.
2. Environmental pressures – It may not have escaped your notice that there is a major shift in attitudes to fossil fuels, and there is pressure to increase taxes to “encourage” reduced reliance on these fuels, moving to electric vehicles and just using cars less.
On the other side of the debate, and this has been made very clearly by a number of pressure groups, the reduction in taxation on transport has provided more cash to businesses and homeowners which has helped drive the economy forward. Transport, agriculture and construction are major employers and contributors to the UK economy and if the costs rise, it will knock on the impact to a huge range of products and services – all eventually picked up by consumers.
As for the transition to electric vehicles, this is very difficult for car users, as the vehicles are still very expensive and niche – but far more available than electric tractors or heavy plant equipment! – so in reality, any lift in duty will have little or no effect in pushing users over to electric.
On balance, and based just on my reading of where the UK Government looks to be heading and with the zeal of a new 5 year term and a healthy majority, I think the decision to lift duty on all fuels will be taken at this first budget. I don’t think the Government will risk wholesale riots by farmers, so I can’t see the logic of an 80% cost increase in their main fuel, but I can see a 20% lift, albeit deferred to give supply chains time to absorb them, being implemented. As for road-going vehicles, the green agenda looks to have so much momentum, I can’t see petrol and diesel levels remaining where they are, especially as oil prices are relatively low and the Pound is on the rise, so a 4-5p rise would look likely in my view.
I am not in any way advocating the rises, for many of my customers, any rise will be very bad news, but based on what I can see, I can come to no other rational conclusion.
My advice, is plan for an expected rise next Wednesday, pop down to the local fuel station and fill your car and if you have bulk Diesel of any colour, get it delivered by Wednesday at the latest and fill your tanks. It will only give you a one-off saving, but it might take a bit of the sting off the rise.
Let’s see what comes out next week.
CEO at Craggs Energy Group