Red Diesel Rebate would hit Scottish contractors hard

Red Diesel Rebate would hit Scottish contractors hard

UK Budget 2020 

On March 11th, the Chancellor will announce the UK Government’s Budget for 2020/21.

If as expected it includes cutting the rebate on red diesel, this could cost the UK’s construction industry at least £280 million a year. It would be a devastating blow to many Scottish based civils contractors, already struggling thanks to falling workloads over the past two years.

Currently, there is a 47p reduction in the cost of red diesel, reflecting the fact that plant, including excavators and generators, does not use the road network. This rebate is set to be axed if the UK Government plan goes ahead.

CECA have written to the Chancellor of the Exchequer to outline how his proposed plans to remove the rebate will negatively impact the construction supply chain, risking placing further pressures at a time when margins are already extremely tight for many. There is a real danger that axing the red diesel rebate could hit many SMEs extremely hard, at a time when the sector is already struggling.

More than half of red diesel is used in the construction sector. Ironically, by withdrawing the rebate, the UK Government will increase costs for the taxpayer, given the high level of public sector contracts civils contractors are engaged on. The change would have an immediate detrimental impact on Scotland’s civils contractors, many who are working on fixed price contracts.

CECA is calling on the UK Government to keep the exemption and instead work with the construction sector to phase in any future cuts in the rebate, to allow for the roll out of lower carbon plant across construction sites and to give civils contractors time to adapt and allow industry to engage in a sustainable transition to greener fuels in the years ahead.

Commenting on the Government proposal, CECA Scotland Chief Executive Grahame Barn said:

“I have been in touch with CECA Scotland members right across Scotland who are extremely concerned about this damaging proposal from the UK Government and the impact it will have on the Scottish civils sector. Members are telling me they will have to review tenders and that it will have a severe cost impact. Many are engaged on fixed price contracts; there is no way of recovering the significant extra costs from clients. There is a real danger that if the axe falls, there will be Scottish contractors, particularly SMEs, who will be forced out of business.

Grahame added: “This is a short-sighted proposal from the Chancellor and CECA Scotland urges him to think again. At the very least, we hope he will listen to industry concerns and at the look to phased approach to the rebate reduction, otherwise he risks undermining the very sector which is central to his Government’s infrastructure ambitions.”

How will this impact on CECA members?

Here are just a small sample of member views on the potential removal of the rebate on Red Diesel.

“An immediate removal of the rebate would have a severe impact on our business with an increase in our annual red diesel fuel costs of around £300,000, with a direct effect on our bottom line profitability and additional pressure on short term cash flow also”

“We believe the changes would cost our business in excess of £500k per annum. The immediate removal would have a significant effect on current projects where we have no recourse to recover these costs. In the longer term the impact would be lessened as the entire market would be pricing at the same level, but it may make some projects unaffordable, which will impact the industry”

“ We estimate that the proposal will cost us approximately £21500 per week”

“ If the full rebate of 47p is removed this would equate to approx. £1.4m addition to business costs.  In 2018-19 we bought 227,881 litres of red diesel. Clearly this would equate to a £107k annual impact on our business. As a business we are already under severe financial stress and such a change would clearly not help!”

“ The impact of removing the red diesel rebate would be catastrophic.   Based on only the first 8 working weeks of 2020 the impact would be an additional cost of £526k. Our red diesel usage for the calendar year exceeds 1 million litres as the current program is heavily skewed towards large scale earthworks. The margins are already tight on the existing work. The potential removal of the rebate would decimate any hope of a positive return for the business.   Based on actual usage for 2019 (2.9m litres), the additional cost would have been £1.37m over the course of the year.”

“Diesel makes up around 3% of Contractor costs. Any increase to this cost will directly affect profitability reducing the viability of many companies”.

“ This would represent a “smash and grab” on an already vulnerable industry, nothing less”

“This sudden removal gives the users little time to positively engage on long term improvements to alternative environmentally better energy resources.   The users of this fuel would have no choice but to pass the costs onto consumers of products putting immediate pressure on end customers”.

“The proposed change would put this business in an extremely vulnerable position”.

Read CECA National’s Press Release here