Will construction see red or green today?

Today - Friday 1st April 2022 -  marks the end of red diesel for the UK construction industry.

Red diesel is used in off-road vehicles and machinery, most notably in the construction and agriculture sectors. Users are entitled to a rebate on the tax or duty paid on the fuel purchased. "Red" diesel is exactly the same fuel as regular "white" diesel, but has had a red dye added to it to prevent its misuse in regular road vehicles.

As of today, contractors must ensure that the plant and equipment they use on site is always filled with the correct fuel – and, if that fuel is diesel, then it must be white diesel.

“White” diesel for road cars is taxed at 57.95p per litre, whereas red diesel has - until 1 April 2022 - qualified for a rebate of 46.81p per litre. This has meant that red diesels'  effective duty rate is just 11.14p per litre, some 47p per litre cheaper than white diesel. That was a reduction on the diesel tax rate of over 80%.

The UK Government position on this change is driven by a desire to ensure fairness between the different users of diesel fuels, the encouragement of development and adoption of greener alternative technologies, and additional "green" dividends around seeing fuel users improve the energy efficiency of their vehicles, plant and machinery.

From 1 April 2022, where rebated fuel is used in a vehicle or machine that is not entitled to use it, HMRC is entitled to seize the vehicle or machine and may issue a fine of £250. They can also apply a penalty of up to 100% of the duty that has been evaded.

The UK Government had announced red diesel's demise back in the 2020 Budget, and no doubt the construction (and agriculture) industries have appreciated the two-year lead-in time to red diesel reform, which will have given businesses in these sectors time to prepare for this tax change.
 
Nevertheless, coming after two years of pandemic-related disruptions to construction supply chains, and now significant fuel and materials price volatility caused by Russia's war in Ukraine, the change will only accelerate construction price escalation. In an industry already dealing with tight margins, these price escalations will likely need to be borne by the clients of the sector.
 
The loss of red diesel will particularly impact subcontractors with significant plant and equipment fuel costs, such as earth moving and groundworks contractors. For these specialist subcontractors, their overall operational costs could easily rise by 5%-6% overall as a result of this reform.
 
Whilst unwelcome at one level, the broader UK construction sector is increasingly committed to its net-zero commitments. In that sense, I suspect “green” trumps “red” on this occasion...