Hudson warns construction firms about new red diesel rule changes

A new green tax on machinery is due to come into force next year and construction SMEs should be prepared for a sharp rise in fuel costs.

The removal of the red diesel rebate will hit groundworks contractors and quarrying companies the hardest, especially those on fixed-price contracts, and is likely to drive up material prices across the construction industry.

In the longer term, the move should lead to the adoption of new low-carbon technologies.

The sector will lose its entitlement as part of the government’s commitment to meet its climate change and air quality targets. Red diesel currently attracts a duty of 11.14p per litre compared to 57.95p for regular white diesel.

The fuel is mainly used for off-road purposes to power diggers, dozers and dump trucks, cranes and generators, and it is also heavily used in quarrying and material production. It accounts for 15 per cent of all diesel used in the UK and is responsible for the production of nearly 14 million tonnes of carbon dioxide a year.

Shaun Burton, regional account manager at Hudson Contract, has been advising construction SMEs about the tax change.

He said: “Some clients are telling us that while the tax change is good from a climate change perspective, it is a very blunt instrument that will double input costs overnight and should have been tapered.

“Specialist subcontractors on fixed-price contracts are going to be hardest hit, especially groundworks and quarrying companies, but everyone could be hit as material prices increase across the board. Wherever possible, price increases will be passed along the supply chain to end users and eventually consumers so people should not be surprised as prices start to rise.

“Our clients tend to be forward-looking and some are already looking at ways to mitigate the impact by using alternative fuels such as hydro-treated vegetable oil, which can be used in conventional diesel engines, or battery power for smaller machinery. As demand grows, the technology will develop.”

The government has said the change aims to ensure that most diesel users are charged at the same rate as motorists to reflect “the harmful impact of the emissions they produce”. The government wants the tax system to incentivise users of polluting fuels like diesel to improve the energy efficiency of their vehicles and machinery, invest in cleaner alternatives, or just use less fuel.

Some of our readers will remember the introduction of the Aggregates Levy in 2002 which has led to environmental improvements and encouraged the use of recycled and secondary materials. It would be nice to think the same could happen with the diesel tax but the reality for most will simply be higher fuel costs with no genuine alternatives available.

Anyone looking at entering into contracts which will run for more than six months should be considering how this will affect their plant and material pricing as the new rules come into force from 1 April 2022.