The fuel duty is 46 pence per litre less than standard white diesel. It is used mainly for off-road purposes, such as to power bulldozers and cranes used in the construction industry, or to power drills for oil extraction.
From 1 April, the construction industry will no longer be allowed to use it to power diggers and generators — firms will have to pay more for white diesel instead.
HMRC said the new restrictions were designed to help meet climate change and air quality targets.
Red diesel accounts for around 15% of all the diesel used in the UK and is responsible for the production of nearly 14 million tonnes of carbon dioxide a year.
From April, red diesel can only be used for the following purposes:
- For vehicles and machinery used in agriculture, horticulture, fish farming and forestry. This includes allowing vehicles used for agriculture to be used for cutting verges and hedges, snow clearance and gritting roads
- To propel passenger, freight or maintenance vehicles designed to run on rail tracks
- F or heating and electricity generation in non-commercial premises, this includes the hearting of homes and buildings, such as places of worship, hospitals and town halls; off-grid power generation and non-propulsion uses on permanently moored houseboats
- For maintaining community amateur sports clubs, as well as golf courses (including activities such as ground maintenance, and the heating and lighting of clubhouses and changing rooms)
- As fuel for all marine craft refuelling and operating in the UK (including fishing and water freight industries), except for propelling private pleasure crafts in Northern Ireland
- For powering the machinery (including caravans) of travelling fairs and circuses.
Surplus stock
HMRC acknowledge that some firms will have a surplus left over in storage tanks. Firms can only use up rebated fuel after 1 April if the fuel was legally put into the vehicle or machine before that date.
HMRC are advising companies to run down stock as close to nil as reasonably practicable before 1 April.
If unable to use surplus stock by the deadline, firms are advised to sell or give it to someone who is allowed to use it, or to a Registered Dealer in Controlled Oil (RDCO). Alternatively, they can dispose of it via an approved waste oil recycling or disposal company.
Firms will need to keep records to show how and when the fuel was disposed of or sold.
Impact on construction companies
In a report by the BBC, a Carmarthenshire-based building firm said it will cost them an extra £200,000 in annual fuel bills.
Dafydd Jones, from TRJ in Ammanford, has called on the Treasury to delay the introduction of the new rules after two challenging years.
He said: "It means an additional outgoing for us of £200,000 per annum on top of what we already spend on fuel.
"The Treasury is going to gain a hell of a lot of income from the industry, across the board."
Mr Jones' MP, Jonathan Edwards, said he will raise the changes with the Treasury.