But first...

What is Red Diesel?

Up until now, UK leisure boaters have been able to fuel their boats with red diesel which is subject to lower VAT. Coloured with red dye to distinguish it from the more expensive variety, red diesel is typically available for around 40p per litre, less than half the national average for diesel on the forecourt.

The issue.

In recent years, permission to use red diesel became subject not only to national approval, but also the EU's. The reason is down to EU policies that bring into line taxes on fuels and energy, and the fact that consent to use red diesel depends on exemption (derogation) from these EU rules.

The Royal Yachting Association (RYA) fought to extend the derogation that allowed UK leisure boaters to use lower duty red diesel. In October 2006, the British Government decided to support the case. However, EU officials failed to accept the government's arguments and have decided that the derogation should end with effect from the end of December 2006. There is now a grace period in force for the phasing out of red diesel in the UK. In pleasure craft, red diesel will remain usable legally until November 2008.

Honesty is the best policy.

Her Majesty's Revenue and Customs (HMRC) has decided that pleasure craft users can carry on using red diesel as long as they make a declaration to the supplier and pay the full rate of tax for heavy oil.

It will then be the responsibility of the Registered Dealer in Controlled Oils (RDCO) to declare the duty collected to HMRC. What makes the situation less clear is that fuel which is intended for domestic use (not for boating) will still be available at the lower tax rate.

'Availability and Safety'.

The HMRC's Dave Fitzgerald confirmed the core policy had been fixed but that HMRC would be working closely with the RYA, the BMF and other stakeholders to develop the detail of the declaration process and apportionment of fuel for domestic use.

Following that consultation process, HMRC will produce comprehensive guidance.

'Our main concerns were availability and safety,' said Neil Northmore, the RYA's government affairs adviser.

'We were aware that there was a danger that some retailers in more remote areas would simply not bother selling to pleasure boats on the premise that it would be more trouble than it was worth to distinguish between private and commercial craft, and then process the paperwork.'

Increase in duty.

Howard Pridding, executive director of the BMF said:

'We are pleased with how HMRC has managed the consultation process and the position that they have finally adopted. When buying fuel, people will be required to sign a declaration that states whether their boat is for private or commercial use.'

It will then be up to HMRC whether they wish to investigate whether the purchase was correct or not, he explained.

The Future of Red Diesel.

On 28 February 2008, HM Revenue & Customs revealed that from 1 November this year, boaters will be paying a duty rate of 56.94 pence per litre, instead of the current rate of 9.69 pence per litre.

It will become illegal to have diesel on board pleasure craft if it cannot be proven that it was purchased at the higher rate of duty, meaning that boaters will have to keep records of all their diesel purchases.

Diesel bought for use as heating fuel will still be available at a rebated rate. So to add further complication, there will be a system in place where you can declare that a proportion of the diesel you are taking on is for 'domestic purposes'!

Only time will tell how this news will hit the market, but it's not hard to imagine it having some impact.