Red Diesel
Red diesel continues to be available at the waterside but recreational boaters must pay the full rate of duty when purchasing fuel for the purposes of propulsion. Red diesel used for domestic purposes such as heating and lighting, or for powering navigational equipment and aids, may be purchased at the reduced rate of duty. Commercial users of red diesel may purchase red diesel at the reduced rate of duty. But what counts as commercial activity?
From 1 January 2011 restrictions on the sulphur content of gas oil (red diesel) marketed for use in "non-road mobile machinery" mean it will be virtually sulphur free, as is already required for road diesel. It is likely that in many cases where the supplier needs to comply with the virtually sulphur free rule, a red dye could simply be added to road diesel. Boat owners will therefore need to be aware that they may be buying fuel with up to 7% biodiesel and may need to take some precautions. See Red Diesel and the Fuel Quality Directive for further information.
Buying Red Diesel
How does the system work?
1. When recreational boaters buy diesel for their craft, they need to make a declaration to the supplier if they intend the fuel to be used for propelling a private pleasure craft.
2. The recreational boater must also declare what percentage of the fuel will be used for propulsion (as opposed to domestic purposes such as heating and lighting).
3. The wording prescribed by HMR&C for this declaration is:-“I declare that [ ]% of the fuel purchased will be used for propelling a private pleasure craft” and the declarant will be asked to pay the full rate of duty on the declared proportion of the fuel purchased.
Legal Background
Pursuant to the EU Energy Products Directive 2003/96, EU member states are free to impose their own rate of duty on motor fuel and heating fuel subject to minimum levels specified in the Directive. The Directive also provides that, except in very limited circumstances, member states are not permitted to levy different rates of duty on equivalent fuels.
In the Directive, express provision is made for motor fuel used for “the purposes of navigation within Community waters (including fishing), other than private pleasure craft”, heating fuel and fuel used for generating electricity on board a craft to be levied a reduced rate of duty.
The UK secured a derogation from this Directive to permit the UK to continue to levy a reduced rate of duty on motor fuel to be used for propulsion in private pleasure craft but that derogation expired on 31 December 2006 and the UK Government’s application for the derogation to be extended was rejected by the European Commission.
With the end of the derogation, the UK is now obliged to levy the same level of duty on motor fuel used for propelling private pleasure vessels as it does for equivalent motor fuel used in other applications (such as road vehicles).
Rates of Duty
Although recreational boaters need to pay the standard rate of duty on diesel used for propelling private pleasure craft, recreational boaters are still entitled to buy diesel at the reduced rate of duty for use in non-propulsion purposes, such as heating, lighting, electricity generation, refrigeration, air-conditioning or providing domestic hot water.
This clearly presents difficulties for some private pleasure craft, such as those that are fitted with a generator or heater that runs on fuel supplied from the same fuel tank as the engine, those that use the engine alternator to charge domestic batteries or those in which the domestic hot water system or refrigerator compressor is driven by the engine. Similar problems may also arise for craft propelled by diesel-electric systems.
Working out the propulsion percentage split
How do we work out what percentage of fuel we intend to use for propulsion?
The EU Energy Products Directive specifically refers to ‘fuel for the purposes of navigation’ (which is reflected in UK law as ‘fuel for propelling’), so there is no legal basis for HMRC to impose a single standard apportionment to be applied universally that pays no regard to actual usage for propulsion.
However, HMRC’s advice for boaters on this issue is as follows:
“Q. What will be the allowance for fuel used on boats for heating and lighting?
A. There is no fixed allowance. It is for the purchaser to declare the percentage of fuel used for propulsion. However, analysis by both the industry and HMRC suggests that a split of 60% for propulsion and 40% for domestic use (heating, cooking etc) probably reflects most people’s use and it is therefore likely that many users will declare such an apportionment. This will make it easier for suppliers (RDCOs) to work out additional duty and VAT.
However, where a purchaser knows that their propulsion use may be more or less than the above apportionment split or a craft clearly has no domestic use, then they must declare their actual intended usage.
Q. What about residential boat owners where nearly all fuel is for domestic purposes – what can they declare?
A. We have recognised the status of residential boat owners whose primary residence is their boat. Some of these will be at fixed moorings or move just a very short distance along the tow path from permanent moorings.
Living aboard
If they live aboard the craft permanently and hold certain documentation, such as a Houseboat Licence, Residential Mooring Licence, Council Tax Bill in respect of the mooring, or other peripheral documentation, invoices or bills which provides proof of permanent residency, they may purchase all their fuel at the rebated rate (as if they were a commercial vessel).
They will still be required to make and sign a declaration saying that 0% of the fuel is for propelling purposes. It will be the responsibility of the declarant to ensure that they hold the requisite documentation should HMRC wish to check the validity of the declaration made in these circumstances. Continuous cruisers may not declare 0% under these arrangements, even if they reside permanently on their craft, they must declare their actual intended usage for propulsion.”
Registered Dealers in Controlled Oils (RDCO) will need to account to HMRC for the additional duty received from recreational boaters. RCDOs already owe a general duty of care to ensure that they only make supplies of controlled oil for legitimate uses.
To help you define your activities we have provided guidance for clubs, training centres and charterers.
What is a “private pleasure craft”?
The definition of “private pleasure craft” for the purposes of the Energy Products Directive and the purchase of red diesel in the UK is defined in the Directive as:-
“Any craft used by its owner or the natural or legal person who enjoys its use either through hire or through any other means, for other than commercial purposes and in particular other than for the carriage of passengers or goods or for the supply of services for consideration or for the purposes of public authorities”
This definition has been inserted into to the Hydrocarbon Oil Duties Act 1979 (the primary legislation that governs the levying of duty on fuel oil in the UK) by the Finance Act 2008.
The definition of “private pleasure craft” is different from the definition of “pleasure vessel” used in UK legislation such as regulations made under the Merchant Shipping Act 1995, including the Merchant Shipping (Vessels in Commercial Use for Sport or Pleasure) Regulations 1998.
The definition of “pleasure vessel” is narrower than that of “private pleasure craft” so it is likely that some craft that are not “pleasure vessels” for the purposes of the Merchant Shipping (Vessels in Commercial Use for Sport or Pleasure) Regulations 1998 and therefore have to comply with the relevant Code of Practice will nevertheless still be “private pleasure craft” for the purpose of purchasing fuel.
Conversely, a yacht that is not certificated to operate commercially is unlikely to be able to claim that it is not a “private pleasure yacht”.
How the definition of “private pleasure craft” will be interpreted and how it will interrelate with the definition of “pleasure vessel” will be a matter for the Courts to determine in due course. We set out below, however, our understanding of how the definition of “private pleasure craft” might be applied in certain circumstances.
Bareboat Charter
Likely to be regarded as a private pleasure craft, whether or not the charter is “commercial” and whatever the means of payment, if any
Skippered Charter
Unlikely to be regarded as a private pleasure craft if the owner/charter company provides a skipper, as this may equate to the carriage of passengers for consideration
Training Courses
Unlikely to be a private pleasure craft, as this may equate to the supply of services for consideration
Yacht Delivery
Unlikely to be a private pleasure craft if the delivery is by professional crew on behalf of a yacht manufacturer, distributor or charter company; otherwise, likely to be a private pleasure craft
Club yacht used by members* Likely to be a private pleasure craft
Club committee boat* Likely to be a private pleasure craft
Club safety boat* Likely to be a private pleasure craft, although a coastal club may be entitled to reclaim the duty in accordance with HMR&C Notice 263 ‘Marine Voyages – Excise Duty Relief for Mineral (Hydrocarbon) Oil’
Club launch* Likely to be a private pleasure craft
* Many of these craft fall within the definition of "pleasure vessel" for the purposes of the Merchant Shipping (Vessels in Commercial Use for Sport or Pleasure) Regulations 1998 and do not need to comply with the applicable Codes of Practice. As such, it is likely that they would also be regarded as "private pleasure craft" for the purposes of buying fuel.
What about clubs that buy diesel on behalf of their members?
Clubs will need to register as a Registered Dealer in Controlled Oils (RDCO) (see HMRC Notice 192 for more information).
Clubs or recognised training centres that are RDCOs will be entitled to receive deliveries of diesel at the rebated rate but they will then be responsible for obtaining a declaration from those to whom the fuel is supplied and will need to account to HMRC for the additional duty received from recreational boaters. RCDOs already owe a general duty of care to ensure that they only make supplies of controlled oil for legitimate uses and any clubs or training centres that are RDCOs should contact HMR&C directly for additional information.
Example calculation
Guide to the calculation of duty and VAT under the new arrangements for illustration only. The proportion spilt between propulsion and domestic usage will vary. VAT is charged at the reduced rate of 5% on fuel for propulsion and domestic use. This example assumes a 60% (propulsion) and 40% (domestic) split for a purchase of 100 litres of red diesel (the price of diesel is assumed to be 70 pence per litre (ppl) which includes 10.99 ppl duty already paid to fuel supplier):
Basic fuel price
100 litres @ 70 ppl = £70
VAT @ 5% = £3.50
Basic price of fuel = £73.50
Propulsion calculation (i.e. 60%)
Additional duty payable = 46.20 ppl (57.19 ppl full rate of duty
less rebated rate of 10.99 ppl
included in basic fuel price)
60 litres @ 46.20 ppl = £27.72
VAT @ 5% = £1.39
Total additional duty and VAT payable for propulsion = £29.11
Transaction Total = £102.61
Background
The RYA, together with the BMF and IWA have been working closely with Her Majesty’s Revenue and Customs (HMRC) since early 2007 to produce a pragmatic and sensible solution to the implementation of the end of the derogation. Prior to that, from 2003, we successfully lobbied Government to seek the retention of the derogation but this was rejected by the European Commission in favour of its tax harmonisation agenda. Once it was confirmed that the derogation had to come to an end, our key concerns were to: Secure the continued availability of diesel at the waterside Minimise the impact on the boater and industry Avoid safety and environmental implications of transporting fuel by hand In February 2008 HMRC published its outline proposals. We were pleased to see that our efforts had succeeded and that all of our concerns had been taken into account. From then we worked to ensure that the detail of HMRC’s proposals was as simple and effective as possible.
Successful Co-operation
The BMF, RYA, IWA and HMRC were disappointed that the derogation was not renewed by the EC, despite what we all considered to be a very strong case. We also all agreed that the end of the derogation presented considerable difficulties in terms of implementation. We are very pleased, however, that we have been able to work together successfully on behalf of the industry and recreational boaters. HMRC has been very receptive to the concerns of suppliers and users and has managed the consultation process well.
HMRC
HMRC understood our arguments about the potential difficulties for fuel suppliers in calculating duty and VAT – in particular for the smaller operators – when faced with customers claiming different percentages of fuel used for propulsion. HMRC also appreciates the concerns of users about the difficulty of calculating and apportioning their own intended usage accurately and their worries about unintentionally making an inaccurate declaration.
Read the full history of the process
Still have more questions?
Contact at legal@rya.org.uk or telephone 0844 556 9519. Further information for Registered Dealers in Controlled Oils is available from HM Revenue & Customs on 0845 010 9000 .