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Public Bill Committee Debates

Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils Etc.) (Revocation) Order 2006

The Committee consisted of the following Members:

Chairman: David Taylor
Breed, Mr. Colin (South-East Cornwall) (LD)
Brennan, Kevin (Lord Commissioner of Her Majesty's Treasury)
Bryant, Chris (Rhondda) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Dowd, Jim (Lewisham, West) (Lab)
Evennett, Mr. David (Bexleyheath and Crayford) (Con)
Goodman, Mr. Paul (Wycombe) (Con)
Healey, John (Financial Secretary to the Treasury)
Holloway, Mr. Adam (Gravesham) (Con)
Jackson, Mr. Stewart (Peterborough) (Con)
Jenkin, Mr. Bernard (North Essex) (Con)
Jenkins, Mr. Brian (Tamworth) (Lab)
Keen, Alan (Feltham and Heston) (Lab/Co-op)
Khabra, Mr. Piara S. (Ealing, Southall) (Lab)
McCarthy-Fry, Sarah (Portsmouth, North) (Lab/Co-op)
Stuart, Ms Gisela (Birmingham, Edgbaston) (Lab)
Wareing, Mr. Robert N. (Liverpool, West Derby) (Lab)
Ms Rhiannon Hollis, Ms Sara Howe, Committee Clerks
† attended the Committee

Fifth Delegated Legislation Committee

Thursday 11 January 2007

[David Taylor in the Chair]

Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils Etc.) (Revocation) Order 2006

2.30 pm
The Financial Secretary to the Treasury (John Healey): I beg to move,
That the Committee has considered the Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils Etc.) (Revocation) Order 2006 (S.I., 2006, No. 3235).
The Chairman: With this it will be convenient to consider the draft Excepted Vehicles (Amendment of Schedule 1 to the Hydrocarbon Oils Duties Act 1979) Order 2006.
John Healey: I welcome you to the Chair, Mr Taylor, and am greatly looking forward to serving under your chairmanship. I thank Committee Members for agreeing to take the orders together and welcome them all, particularly the hon. Member for Rhondda (Chris Bryant) whose birthday it is this afternoon. Clearly, he can think of no better way of spending his birthday afternoon than considering in some detail the orders before us.
I shall deal with the draft order on excepted vehicles first and then come to the order on excise duties. The purpose of the draft order is to give effect to the Chancellor’s decision set out in the pre-Budget report on 6 December to amend the schedule of excepted vehicles, in other words vehicles that are entitled to use rebated gas oil, commonly known as red diesel.
As the Committee will be aware, duty on oil funds an important part of our essential public services, including the upkeep of the road network. However it has long been accepted that vehicles, particularly in agriculture and construction, that make only incidental use of public roads should not make the same contribution to the upkeep of those roads as other vehicles. For that reason the use of red diesel in excepted vehicles has been permitted since 1935. No full policy review has been undertaken of the excepted vehicles schedule since 1959 and the current schedule was introduced in 1995.
Over the years the schedule has failed to keep up with the pace of changes in technology or commercial practice. New types of vehicle that were not envisaged when the excepted categories were first drawn up have resulted in vehicle owners, enforcement agencies, tribunals and the High Court interpreting the schedule on a case-by-case basis. It has become increasingly unclear therefore why certain types of vehicle should benefit and others should not. In recent years that has been exacerbated by a degree of ambiguity in the schedule itself, which can lead to both unintentional and deliberate evasion of duty. Underpinning the draft order is the conclusion and contention that we drew that if the excepted vehicle concession is to remain viable, it requires reform to make it more consistent. That is what the draft order does.
Hon. Members may be aware, and certainly those who served on last year’s Finance Bill will know, that we began this process more than two years ago with a consultation document entitled, “Changes to Excepted Vehicles Schedule”, published alongside the pre-Budget report in December 2004. A year later we published a summary of the responses to that consultation, together with proposals for change set against what we set out as a principled framework for doing so. Last year’s Finance Bill facilitated those changes and we had a significant discussion, particularly in Committee, on the powers. The Finance Bill included a provision to enable the Treasury to amend the schedule, instead of in primary legislation, by order. This is the first use of that new power.
Finally, because we published the draft order alongside the Finance Bill in the summer, we have continued to receive representations and have made further amendments to the draft order. Throughout the past two years we have been at pains to continue and open discussion and we have been open to well-evidenced arguments for reform. Indeed, one of the joys of this part of my brief is that I have had to consider some of these issues in great detail and I have come across some trade associations that I was not fully aware existed. As a mark of the way that the process has been handled—I pay tribute to the officials in the Treasury and Her Majesty’s Revenue and Customs—the International Powered Access Federation described it as both “rigorous” and “open-minded”.
The new schedule consists of 17 categories, including four new categories, a number of tightened definitions and the deletion of one category, road construction. That category has caused some confusion, but having recently listened to representations from the Road Safety Markings Association that there would be additional costs resulting from that deletion which may not be recoverable from public sector clients, or that those costs may put undue and unexpected pressures on public authorities, we have made one further change in the draft order that we considered alongside the Finance Bill. That is to delay the introduction of the deletion of the road construction category until 2008 to give the industry and public authorities time to adjust to that change. I commend the draft order to the Committee.
Order No. 3235 on excise duties gives effect to another decision of my right hon. Friend the Chancellor announced in the pre-Budget report on 6 December. Duty rates for hydrocarbon oils used as road fuels will be increased in line with inflation and effective rates of duty for biofuels and non-road fuels will be increased by the same cash amount of 1.25p per litre. Hon. Members may remember that these increases were originally set out in last year’s Budget and legislated for in the Finance Bill, but the Finance Act deferred those increases because of oil market volatility until 1 September. However, in July with the risk of oil price volatility remaining high we decided not to go ahead with the 1 September increase and to review the position instead at the pre-Budget report, which is what we did. At that time the volatility had reduced and pump prices had reduced significantly. The effective rates of duty, therefore, change as a result of this order as follows: ultra-low sulphur and sulphur-free petrol and diesel duty rates, normal road fuels, will rise from 47.1p per litre to 48.35p per litre and there will be corresponding changes to other duty rates in line with Budget 2006 announcements. The order took effect from midnight on the day of the pre-Budget report. On that basis I commend this order also to the Committee.
2.39 pm
Mr. Paul Goodman (Wycombe) (Con): It is a pleasure to serve under your Chairmanship, Mr Taylor, for the first time. I will address the two orders in the reverse order to the order in which the Financial Secretary addressed them and begin with excise duties.
We debated the matter during the Finance Bill and it is a matter of record that neither the official Opposition, nor the Liberal Democrats opposed the Government view. As the Financial Secretary said, after that the Government took a decision to postpone the rise owing to the volatility of the markets.
Given that the figure of lost revenue resulting from the deferment is available, I would like to ask the Financial Secretary about the accuracy of the description of Government policy as being that fuel duty rates should rise each year at least in line with inflation. In Committee during the Finance Bill, it seems to me that the Financial Secretary spelt out the Government’s actual policy, namely that the Government have to trade off the effect on businesses and families of raising the duty, and the effect on the environment and public services of not raising it. They also have to factor in the volatility of markets. Is their policy not better described as understandably trying to strike the right balance between those three considerations?
On the Excepted Vehicles (Amendment of Schedule 1 to the Hydrocarbon Oils Duties Act 1979) Order 2006, the Financial Secretary said that there was a degree of ambiguity in what the Government inherited. We hope that any ambiguity has now been ruthlessly excised from the instrument before us. I confess that I have not had a large number of interest groups and trade associations of which I have not previously heard coming to my door to protest at the order, which has been amended slightly since it was presented to the Finance Bill Committee. The Financial Secretary may argue that it is hard to reach a judgment, but I would like to ask him whether the interest groups concerned are more or less satisfied with the amended order than they were with that which he presented to the Finance Bill Committee. I have no intention of opposing either order and with that I will sit down.
2.41 pm
Dr. Vincent Cable (Twickenham) (LD): I extend my pleasure at serving under your chairmanship, Mr Taylor.
Since the Government ceased applying the escalator, two fundamental things have changed. First, there has been a recognition by the Government, following the Stern report and so on, that climate change is a fundamentally important issue and that there is a need to take preventive action with respect to the transport sector as it is one of the biggest sources of CO2 emission growth. Secondly, the remorseless increase in the cost of public transport, which is substantially in excess of inflation, has almost certainly widened the gap between the two modes of transport, to the disadvantage of public transport. Clearly this measure is being implemented to provide a corrective.
I want to raise three basic issues. We need to get a better understanding of the underlying economic assumptions behind the Government’s decision to go with indexation with inflation. Some of this has been spelt out in the Red Book, but it would be useful to have a better understanding of what the Government are assuming about the impact on revenue, vehicle use, and the environment. In technical jargon, it is about the elasticity of demand. These things change over time; at the moment, a variety of factors are changing them, one of which is that there is little spare capacity in public transport. I do not necessarily expect the Minister to give me all the information now, but it would be helpful to have an updated technical note from the Treasury explaining clearly what assumptions it is making. We want to be conscious that the inflation indexing has not just been plucked out of the air, but is based on solid numbers, calculations and an economic model of how the country works.
We understand clearly what is the Government’s policy, but there is no clear sense of their strategy. In the days of the 6 per cent. escalator, everyone knew where they stood; there was a clear sense of direction. Since then, we seem to be improvising policy. There was a reluctance to superimpose excise duty increases when we were in the middle of an oil strike. I did not criticise that, as it was understandable at the time.
Now that oil prices are going down—whether temporarily or permanently, we do not know, but they are falling even in the current political uncertainty towards $50 and they may well go below that—it seems appropriate that we return to some form of indexation. However, the Government’s long-term intentions are not clear. Is there now an assumption that if the price of oil in world markets rises substantially, duty rates will be frozen, and if it falls substantially, duty rates will increase by more than inflation, with the current year being somewhere in between? What is the long-term objective? Are we living from year to year or is there some underlying thinking behind what the Government intend to do about duty rates to provide some long-term certainty and clarity, as we had in the days of the escalator?
My last point is more technical. Like other hon. Members on both sides of the Committee I am frequently taken around the country and shown examples of bioethanol conversion and how vehicle fleets for local councils are being switched. That is very useful and it is something we should encourage. However, I get no sense of whether that potential is being fully exploited and whether the duty differentials being applied are the correct ones, giving the right kind of incentive. I do not ask the Minister to make a definitive statement; I ask him how far the Treasury has studied the extent to which the bioethanol potential, which is obviously substantial, is being fully tapped, whether the Government are open to a review of the implicit subsidy, the duty rate, and how they intend to approach the issue in future.
2.48 pm
Mr. Colin Breed (South-East Cornwall) (LD): If I may, I shall crave your indulgence, Mr. Taylor, to explore with the Minister the use of red diesel in the fishing industry, which is not mentioned in the proposal. Fuel is one of the greatest costs of fishing and fuel costs have risen extensively in recent times. With quotas and days-at-sea restrictions, fishing vessels are being used for things other than fishing— leisure and recreational activities, for example—in order to earn some income from them. Those activities are not eligible for using red diesel, but normal fishing would be eligible. On the basis that the vessels are unlikely to have two different tanks, and the difficulty of determining which was which, it was felt that over a long period of time they would be able to continue to use red diesel for all the boat’s activities. Boats are obviously not concrete pumping machines, road contracting machines or any of the other things that are mentioned, but they are very important users of red diesel. Will the Government, at a later stage, address the issue of the use of red diesel in the fishing industry?
The Chairman: I allowed that question although it falls strictly outside the order. I will happily allow the Minister to reply to it briefly at the end of his other comments.
2.49 pm
John Healey: With your indulgence, Mr. Taylor, I will answer that question at the beginning of my comments. It falls not just strictly but widely outside the terms of the order. The excepted vehicles schedule applies to vehicles on the road network and using public roads. Fishing vessels clearly do not fall into that category.
The hon. Member for South-East Cornwall (Mr. Breed) mentioned the commercial use of vessels, perhaps conscious of recent decisions taken by the European Commission on the use of red diesel in private vessels. The Commission has refused to renew our derogation to allow that to continue, which has significant implications for the way in which we will make the required changes. There is no recourse to challenge the decision and we shall consider the matter carefully with the main interest groups in the coming period. For commercial use people will be entitled to continue to use red diesel and rebated fuel rather than pay the road fuel rate applicable for use in private vessels.
I am grateful to the hon. Member for Wycombe (Mr. Goodman) for reminding the Committee that the Opposition did not oppose the fuel duty changes that we made last year. He asked about how we have made the decision. Our assumption is based on the fact that tax rates will rise in line with inflation each year—that is our starting point—to maintain the real value of the taxes. Beyond that, we must make a balanced judgment about competing interests and pressures, some of which are social and have distributional consequences like any tax decision, some economic and some environmental. That is the complex of factors on which the Chancellor must make judgments at each Budget.
On the schedule being amended by the other order, I am glad that the hon. Gentleman has not had trade associations banging on his door to protest at what we are proposing. I would like to think that that is a reflection on how we have handled the process. He asked whether the trade associations by and large are more content with the current draft order than they were with the draft order that we considered in the summer. The short answer is yes. I can quote comments from the National Farmers Union, the Construction Plant Hire Association or some of the less well-known trade associations, if he wishes—for example, the Agricultural Engineers Association or the National Association of Agricultural Contractors—but he may be interested in the comments of the Road Surface Dressing Association, which takes a particular interest in tar sprayers. It states that the amendments that we made are clear and, from its members’ point of view, satisfactory. I hope that that reassures the hon. Gentleman.
Let me turn briefly to the three points that the hon. Member for Twickenham (Dr. Cable) raised. Our underlying assumption about increasing fuel duty rates in line with inflation, like many other tax rates, is not arbitrary or improvised. It is well established and referred to in the Red Book. At present, when considering the balance of economic and environmental impacts, it is in fact the volatility of the world oil price rather than decisions on duty that have a more profound impact on demand or emissions that affect the environment. I hope that he accepts that this is not an improvised process, that the circumstances at each pre-Budget report or Budget are different, and that the Chancellor has to weigh them up at the time.
There is of course a further use that we have increasingly made of duty rates on road fuels and that is to use discounts or changes to help drive the market in a way that will benefit the environment. We did that to encourage the switch to ultra-low sulphur fuels, and we are doing it now to encourage the greater uptake of biofuels, about which he is concerned.
The UK market for biofuels doubled last year. It is not just the discount that is beginning to drive that and that will drive it in future. The hon. Gentleman will be aware that in the Budget last year the Chancellor laid out plans for a road transport fuel obligation that combines in the first three years a duty discount on bioethanol and biodiesel with a buy-out price at a combined support level that is not 20p but 35p per litre. It is designed to and will lead to a total biofuels market of 5 per cent. of all road fuels in Britain by 2010-11. The market will be composed of both biodiesel and bioethanol.
On the basis of those further points, I hope that the Committee will endorse both orders.
Question put and agreed to.
That the Committee has considered the Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils Etc.) (Revocation) Order 2006 (S.I., 2006, No. 3235).


That the Committee has considered the draft Excepted Vehicles (Amendment of Schedule 1 to the Hydrocarbon Oils Duties Act 1979) Order 2006.—[John Healey.]
Committee rose at three minutes to Three o’clock.

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