The end of the red diesel rebate scheme: where will the cost land?

Red diesel is used by many contractors and subcontractors alike in the construction industry, in order to benefit from the rebate on the tax or duty paid on the fuel.

It was announced by the Government, as part of the 2020 budget, that the use of rebated red diesel or rebated biofuels (e.g. Hydrotreated Vegetable Oil (HVO)) by a variety of industries, including the construction industry, would be discontinued from 1 April 2022. Whilst many in the industry have lobbied the Government to defer the changes due to ever-increasing fuel costs, the Chancellor Rishi Sunak confirmed that there would be no delay and the rebate ended as planned.

Whilst in the long term the uptake of more renewable sources may occur, in the short term the industry is simply not ready and will have to bear the increased cost of white diesel (which has a temporary reduction of 5p per litre for the fuel duty).

Now is therefore an important juncture to consider what happens now that the scheme has ended and, more importantly, which party will carry the burden of this change. The financial pressure comes at a time when companies are already having to face rising costs of materials and a shortage of resources and labour.

For existing projects, it will be a matter of contractual construction that will determine whether it is the employer or the contractor that absorbs the increased cost, caused by the loss of the rebate.

If there are any contracts that were entered into before 11 March 2020, being the date on which it was announced that the scheme would end, it is possible (depending on your contract’s wording) that this change could constitute a change in law and engage the relevant contractual mechanisms and remedies.

If contracts were entered into after 11 March 2020, the change would likely have been foreseeable to the contractor and the expectation will be that the contractor has already priced the contract to reflect this upcoming change in law. In this instance other relief clauses will need to be reviewed.

It is important to check whether contracts have a change in law provision. If they do, it is then worth considering whether the end of the rebate constitutes a ‘change’ based on how the clause has been drafted.

If you are using the NEC form of contract which incorporates Option X2 (Changes in the Law), you should consider putting in an Early Warning Notice (“EWN”) (if not already done) and discussing with your estimating teams how you may price the project accordingly going forward. Additionally, a compensation event notice to either the Project Manager or Contractor (depending on your contractual structure) should also be given.

Contractors and subcontractors are already feeling the squeeze caused by an increase in the cost of materials and labour. As the cost of fuel is at an all-time high the loss of the rebate could have an even bigger impact on the profitability of a project if appropriate action is not taken now.    

This will impact all levels of the supply chain. With this in mind a project-wide discussion on how best this can be managed for all involved may be the optimal solution.

If you would like to discuss how the rebate may impact your contracts or projects please do not hesitate to get in touch.