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Construction groups have sent a flurry of letters to the Chancellor amid fears that the subsidy on red diesel will be abolished in the Budget next week, costing the construction industry up to £490m a year.
The BBC and Financial Times have both reported that Chancellor Rishi Sunak is preparing to announce that the tax benefit of red diesel given to users of plant machinery and off-road vehicles will be scrapped.
The move is believed to be driven by a plan to encourage a switch to greener alternative fuels to help the UK meet its climate change targets. Red diesel currently accounts for about 15% of total diesel sales in the UK and costs the Treasury about £2.4bn a year in revenue. Red diesel is essentially the same as regular diesel but it has a dye in it to indicate that it is largely tax exempt.
But the government has been warned of “significant financial implications” for construction if it makes the move, which would see users of diesel-powered construction plant machinery pay an extra 47 pence on every litre of diesel used.
‘No consultation’
In a letter to Sunak, Build UK chief executive Suzannah Nichol said: “We understand you may be considering a change in the rate of tax applicable to the ‘red diesel’ used on construction sites. There does not appear to have been any consultation on this potential change or the implications considered.
“Changes to the rates of tax on diesel fuel would have a significant impact on the construction sector and, whilst we have not had the chance to fully evaluate the additional cost, we understand that the average construction firm spends around £15,000 a year on red diesel.
“Given red diesel and standard diesel currently have a tax rate differential of 420% per litre, this will lead to a considerable increase in costs.
“Alongside the impact of IR35 & Reverse VAT, this sudden cost increase could significantly slow down construction just as the Government is looking to kick start the Infrastructure Revolution. At the very least, if the tax on red diesel is to change, industry should be properly consulted and an appropriate transition period introduced.”
“As the construction sector’s largest customer, the government will end up paying much of this cost, as well as inflicting additional pressure on the industry’s supply chain, at a time when we need the sector to perform well and boost economic growth.
“We would welcome the opportunity to work with government and others across the industry to undertake a phased approach to the development and roll-out of lower-carbon plant across construction sites.”
Plant hire worries
Meanwhile Kevin Minton, chief executive of the Construction Plant-hire Association (CPA), which represents 1,700 companies who are owners of 85% of the construction plant machinery used in the UK, has written to Sunak to express concern.
In the letter, he said: “As a key sector within the wider construction industry, we are concerned about reported proposals in the forthcoming budget, to place restrictions on the use of red diesel in construction machines.
“The CPA set out our concerns in the government’s call for evidence on the use of red diesel back in 2018. It is disappointing to see such measures being discussed again.
“Restrictions on the use of red diesel in the construction sector would, unfortunately, have a profound impact for our members and the wider construction industry by raising costs and squeezing already tight profit margins. This in turn will limit scope for investment in new skills and new cleaner, greener technology – something the government is encouraging our members to do.
“Such proposals will only undermine this progress, adding greater uncertainty at a time when construction remains fragile, despite government plans to increase spending on infrastructure.
“We urge you to delay any consideration of this issue until a proper consultation can be carried out, and suitable amelioration measures identified. I look forward to discussing this issue further,” he continued.
