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Mr. Laws: I shall be fairly brief, as the hon. Member for Chichester (Mr. Tyrie) has set out the case quite clearly. He made his concerns clear, and even managed to mention his constituency interests in respect of the leisure boat industry. He did that very effectively, and I commend him for it. I promise the Committee that I shall not speak at such length about my constituency interests in agriculture but, as the hon. Gentleman said, the proposals would have a very real effect on that sector.

I have two concerns about the measure. First, as the hon. Member for Chichester said, it is a tax grab masquerading as an environmental measure. The relevant line of the Red Book increases revenues by some £450 million over a three-year period. That is a very significant amount of money. If the Government see the proposal as part of an environmental strategy, there is no reason why the increased revenue could not be offset in some other area to stimulate more environmentally helpful activities.

The second reason for concern is the sheer size of the increase—57 per cent. on the duty for red diesel. That is a huge rise in just one year, and we hoped that the Treasury would see the advantages of moving tax policy in much smaller increments, particularly when changes
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of this type have a big impact on particular sectors. The hon. Member for Chichester mentioned the impact on farming, and that sector has estimated that the change will add 10 per cent. to on-farm fuel costs, which is extremely damaging at a time when agriculture has been under such pressure for a number of reasons, including depressed prices of many products and commodities. We would hope, therefore, that a change of this type would be accompanied at the very least by some measures to offset the impact on the farming sector.

Another area of concern, referred to by my hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) at the time of the Budget statement, is the potential impact on the railway industry, which also uses red diesel. The change will increase costs in a sector of the economy that should have better environmental and lower pollution characteristics than other parts of the travel sector, and it is in that sense a retrograde step. We would have expected the Government to take offsetting action to stimulate environmental improvements elsewhere.

Our concerns, therefore, are the size of the tax grab, the fact that money has not been switched to other sectors to compensate some of those who have lost out, and to stimulate other environmental improvements. We also think that the Treasury should seek to avoid the magnitude of the rise over a short. I have no doubt that the Minister will be unwilling to rescind the measure, but it is regrettable.

Sir Robert Smith: I want briefly to reinforce the argument against such a large rise in a rate of duty in just one year without a clear strategy behind the rise or a clear indication of the principles on which people should plan. The hon. Member for Chichester (Mr. Tyrie) rightly highlighted the leisure boating industry, and as treasurer of the House of Commons yacht club I can certainly reinforce that concern. However, all small boat users, leisure and commercial, will be affected, and while larger fishing boats can reclaim duty, the smaller fleets, which are lower users, will be hit.

Will the Economic Secretary clarify whether red diesel is used for heating, particularly in large public buildings such as rural hospitals and schools? Will they be hit by the duty increase?

John Healey: This has been a short but interesting debate on the range of issues that arise from hydrocarbon oil duties, which are dealt with in amendment No. 2 and clause 5. In considering the amendment, it is important to bear it in mind that the main rate of duty on ultra-low sulphur diesel is 47.1p per litre. The duty on rebated gas oil—red diesel, as it is commonly known—is just 4.22p per litre. The amendment would limit the increase on rebated gas oil to a simple increase in line with inflation, which would be 0.13p per litre. I am interested to note, and glad, that Opposition Front Benchers endorse the need to increase duty on fuels at least in line with inflation, but the amendment does not take account of wider policy objectives.

The misuse of rebated oils as a road fuel cost the Exchequer £650 million in 2002—money that could have been spent on any of our priorities, rather than lining the pockets of criminal fraudsters. In Budget
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2002, following our success in tackling tobacco smuggling, we launched the UK oils fraud strategy. The aim is simple: to reduce the illicit oil market to no more than 2 per cent. by 2006. To do that, we put in place new control regimes for rebated fuels, and there are now more Customs officers working with the trade, identifying fraudsters and stopping their criminal activities. Although it is still early days, that approach is proving successful. The total value of oil fraud detected has increased from £8.3 million in 2001–02 to £13.2 million in 2002–03, an increase of almost 60 per cent. The number of detections of oil fraud is also up and the number of fuel laundering plants disrupted and dismantled is also up.

As with all criminal activity, the nature of oil fraud committed is constantly changing. The strategy and our operational response as a customs and law enforcement agency must change to keep up. We are therefore constantly reviewing the effectiveness of the different approaches and adapting them as required.

In response to a question asked by the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), I can say that it was against that background that we decided to narrow the differential between red diesel and road diesel in the Budget. That in itself will not solve the fraud problem, but reducing the differential between rebated fuels and road diesel eats into the launderers' profits and makes the fraud less attractive.

Sir Robert Smith: What is the final target differential in this so-called strategy on fraud?

John Healey: The hon. Gentleman asks me for the philosophy and principles behind the decision encapsulated in clause 5, and I have laid them out for him. We have not set a specific target, but we have set out our direction. I hope that I have explained in summary some of the background to the Budget changes, and I also hope that it explains why I have to reject this amendment. The duty increase on red diesel announced in Budget 2004 helps to reinforce our strategy to tackle road fuel fraud. The proposed duty increase on rebated fuels will raise £80 million in 2004–05, not £141 million, as calculated by the hon. Member for Chichester.

Mr. Tyrie: I gave the full-year amount, but I think that the Economic Secretary gave the half-year figure that took into account the freeze until September.

John Healey: Yes, that is the revenue that we expect, and the other figures are set out in the Red Book. The Opposition may say that this proposed increase will hurt the farming industry especially, but let us not forget that users of rebated fuel oils pay only a fraction of the duty charged to regular motorists. This measure is also spread across many users in different sectors, rather than unduly affecting the farming community. The hon. Gentleman asked for a breakdown of the burden. The statistics that the Department for Trade and Industry regularly collects from the oil industry show agricultural use accounts for only about 7 per cent. of red diesel
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consumption. The full breakdown of consumption by sector can be found in the DTI's digest of UK energy statistics.

Mr. Tyrie: If the total amount is so small, might not the Economic Secretary consider a targeted exemption from the increase to give some relief to farmers, who have taken some severe hits recently?

John Healey: We must always strike a balance. Any targeting increases complexity and I have tried to explain how the decision on red diesel rates has been made to reinforce the wider strategy to tackle fuels fraud. If one were to allow exemptions, one would weaken the impact.

It is interesting to note that the amendment is limited to rebated gas oil: it does not seek to mitigate the increases on the other rebated fuels, such as fuel oil, light oil used as furnace fuel and ultra-low sulphur gas oil, which are also provided for in clause 5. I will be generous and assume that that was an oversight, but it means that amendment No. 2 is only a partial proposal. It gives me the opportunity to point out that each of those fuels is, to some degree, in competition with the others.

The hon. Member for Chichester also asked about the derogation for leisure marine use. The derogation expires on 31 December 2006, and we have an opportunity to try to renegotiate it if we wish. We shall consider the approach that we shall take in the run-up to that date, and we will ensure that we consult widely before we settle on our approach. I emphatically make it clear that the rate change proposed this year is not, as the hon. Member for Chichester suggested, a harbinger of further increases for the leisure boat industry in the run-up to the expiry of the derogation in 2006.

5.15 pm

Like the hon. Gentleman, I want to talk more widely about clause 5, which will change the rate of excise duty for hydrocarbon oils and biodiesel from 1 September this year. It does not set rates for sulphur-free fuels, but the changes that it will make, combined with the separate definition of sulphur-free fuels set out in clause 7, mean that sulphur-free fuels will become the new main road fuels.

Under clause 5, the duty rates for ultra-low sulphur petrol and diesel are increased by 0.5p per litre above inflation, which will create the differential for sulphur-free fuels that my right hon. Friend the Chancellor announced in the Budget of 2003. The differential means that sulphur-free fuels are set to come on stream much more quickly than had otherwise been predicted.

Our initial indications are that sulphur-free diesel will replace ultra-low sulphur diesel almost immediately after the introduction of the new duty rate in September and that sulphur-free petrol should have entirely replaced ultra-low sulphur petrol by the end of the year. These fuels will therefore be widely available for all motorists in the UK well ahead of the EU mandatory date of 2009. As hon. Members will be aware, as well as offering environmental benefits in themselves, sulphur-free fuels will enable the development and introduction of new engine technologies, giving drivers much greater fuel efficiency savings.
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Some people have suggested that the duty should have been frozen, and the hon. Member for Chichester did so in his speech, but that would have a significant impact on a significant source of Government revenue. Each duty freeze represents a real-terms cut in revenue that is vital for maintaining the provision of essential public services. Inflation increases in all duties need to be made to maintain revenue. Even the delay in increasing the duty until September has a price to the taxpayer and to the Exchequer in terms of revenue forgone—about £300 million.

We decided that, with the introduction from 1 September of the differential to switch the market to sulphur-free fuels, the benefits of making changes only once during the year outweighed the hit on Government revenues. It also means that we can reduce the compliance burdens for the oil industry and increase the certainty for motorists at the same time. On that basis, I urge my hon. Friends to reject the amendment and to support the clause.

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