Brussels rocks the boat in UK yacht fuel tax dispute

Yacht owners have not been able to use discounted red diesel since 2007

A long-running dispute between London and Brussels over how much tax yacht owners pay on fuel has intensified.

The European Commission is challenging UK laws, which allow recreational boat owners to buy a fuel commonly used by fishing vessels known as red diesel.

The fuel used to be heavily discounted but boat owners must now pay full duty and acknowledge they may face penalties for its use outside UK waters.

But Brussels says the UK is still not complying and it may take legal action.

Brussels began infringement proceedings in 2011, claiming the UK was not adhering to EU directives on "fiscal marking" designed to prevent improper use of certain petroleum products.

Red diesel, traditionally designated for the farming, fishing and forestry industries, is one of a number of products that is "marked" in recognition it has a lower duty.

The fuel, coloured with a dye to make its illegal use easier to detect, can be up to 40% cheaper than the so-called white diesel typically sold at petrol stations.

£250 fines

Recreational boat owners in the UK were able to use red diesel for several years under an opt-out from EU directives but this expired at the end of 2006.

Discounted diesel can still be used to provide heating for boats but using it to power engines is illegal.

The UK has continued to allow boat owners to buy red diesel but on condition they pay the standard rate of excise duty and repay any rebate received at the time of purchase.

After pressure from the European Commission, the UK changed the law last year to require boat owners and fuel distributors to sign a form acknowledging that this approach only applied in UK waters and not the rest of the EU.

In addition, boat owners are required to acknowledge that UK law does not override any "restrictions or prohibitions" on the use of red diesel that apply in other member states.

Anyone refusing to sign the form faces fines of £250 or 5% of duty due.

'Separate fuel tanks'

But the Commission has now issued a warning notice stating that red diesel is "intended for fishing boats" and that recreational vessels should no longer be able to buy it.

"Currently the UK law does not impose fuel distributors to have two separate fuel tanks, one with marked fuel subject to a lower tax rate and the other with regular fuel subject to a standard tax rate," it said.

"As a consequence, private leisure boats cannot only use fuel intended for fishing vessels but also risk heavy penalties if they travel to another member state and the ship is controlled by the local authorities."

Unless it receives a "satisfactory response" from the government within two months, the Commission has said that it may refer the case to the European Court of Justice.

The Royal Yacht Association said this was the latest step in a long-running battle over the issue.

The organisation, which defends boat owners' rights, said it has obtained specialist tax advice indicating that the UK's continued use of red diesel does not contravene EU directives.

Gus Lewis, its legal and government affairs manager, said: "Our position remains unchanged, in that it is legitimate for UK boaters to use duty-paid red diesel."

A Treasury spokesman said: "We have received a reasoned opinion letter from the European Commission regarding the use of red diesel in private pleasure boats.

"We are studying the Commission's arguments carefully, and will respond in due course."