Red diesel and the agricultural sector

30 Nov 2022


As farmers continue to diversify their business operations, they should guard against complacency when using red diesel for purposes other than those which qualify as agricultural, horticultural, forestry or fisheries use (which is collectively referred to in this article under the acronym ‘AHFF’).

The use of red diesel, or rather its misuse, has long been a matter which HM Revenue & Customs (HMRC) has always taken a keen interest in. Following changes introduced in April 2022, the permitted use of red diesel has been narrowed. Incorrect use can result in vehicles and machinery being seized by HMRC as well as assessments for fuel duty with associated penalties. In extreme cases the offending party may also be subject to criminal prosecution.

What is red diesel?

Red diesel, marked gas oil or cherry red (as it is otherwise known), is a standard mineral diesel to which a red dye has been added. The dye and the chemical markers contained within it do not alter the usability or function of the diesel, and it is applied so it is easily identifiable to HMRC. It is distinct in colour from other fuels, and it stains the inside of fuel tanks and pipes. It is generally only available to buy from specialist suppliers.

The risks of its use outside of permitted purpose

From a tax perspective, red diesel is a rebated fuel, which means it is taxed at a lower rate of fuel duty than that which applies to diesel which is purchased at the pump. It is used extensively in the farming and agricultural sectors and in off-road machinery and tractors. If red diesel is used for purposes for which it is not permitted (eg in road vehicles), users are effectively paying less to fuel those vehicles. It then follows that demand for higher duty rated fuels is reduced, and less fuel duty is therefore paid by the manufacturers or importers of red diesel. It is these parties which have the initial liability to pay the fuel duty to HMRC. However, in the event red diesel is misused by other parties in the downstream supply chain, they become liable for under-paid fuel duty.

The use of red diesel is restricted to off-road use in specific circumstances and these restrictions have been tightened in 2022. Users of red diesel who are no longer listed as being eligible following the April 2022 changes, were advised to run down their stock of red diesel and switch to an alternative. The AHFF sectors are still permitted to use red diesel, but only with respect to certain types of vehicles and machinery (known as ‘excepted’ machines or vehicles). So, if the piece of machinery is not excepted, fuel subject to a full duty must be used, even though it may be being used by a farming business, for example.

Excepted vehicles

The definition of excepted vehicles has been revised as part of the changes. The type of vehicle and its use are key elements to the revised scope of permitted use of red diesel. Not all agricultural vehicles classified by the Driver and Vehicle Licensing Agency (DVLA) as such, are eligible to use red diesel.

In terms of the type of vehicle, excepted vehicles include tractors and single-seat vehicles of less than 1000 kg that are designed and constructed primarily for off-road use. They also include vehicles which have specialised built-in equipment for use such as combine harvesters and crop sprayers.

Agricultural vehicles

In terms of qualifying uses for agricultural vehicles, the Memorandum of Agreement between HMRC, DVLA, National Farmers’ Union (NFU), National Association of Agricultural Contractors (NAAC) and Confederation of Forest Industries (ConFor), provides helpful guidance and interpretation with respect to what qualifies as AHFF use. AHFF use includes the movement of vehicles and machinery, the movement of product and livestock, as well as use by contract farmers, ditch clearing, hedgerow maintenance and maintenance of utilities which cross farmland, such as drainage pipes or electricity cables. The different qualifying uses covered in the Memorandum of Agreement is extensive.

As mentioned, HMRC has the power to inspect vehicles, machinery, and tanks to determine whether red diesel is being used correctly or not, and the consequences for incorrect use can be severe. Using red diesel in agricultural vehicles outside of those listed in the Memorandum of Agreement (as part of diversification into activities outside of the core AHFF business), run the risk of HMRC action as described.

For any further information on the issues discussed in this article, please speak to you usual Saffery contact, or get in touch with Nick Hart.

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Nick Hart
Director, Bristol

Key experience

Nick is a Director in the VAT Advisory Team and advises our full range of clients including corporates, high-net-worth individuals,...