Correspondence on the issue of taxation for bio-fuel in Britain

This page includes some of the recent correspondence between Bio-power members, or Bio-power acting on behalf of its members following inspections by Customs Officers. We will continue to help members to draft letters to put pressure upon Customs Officers to act in a way that is legal and uniform throughout the UK. If SVO is accepted as a vaild Bio-diesel in one situation then this must apply throughout the UK.

The letters are in reverse order with the most recent letters immediately below, and the first letters at the bottom of the page.

Radio 4 feature on Farming Today broadcast Thursday 1st December as an mp3 audio file

Radio 4 feature on the taxation problem broadcast 18th November on 'You and Yours' as an mp3 audio file

Letter from Lord Bach dated 27th November 2005

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My reply to HMRC dated 19 th November ...

Dear Madam,

Thank you for your message and the attached file by way of a reply to my letter 14th October.

You do not state in your reply in what capacity you are responding. Are you replying formally on behalf of the government on this issue? Is it possible to give us the details of those who are part of the Environment and Taxation Policy Team?

You apologise for the delay in reply, and also to the fact that the letter to our member Colin Friedlos was unsigned. However, we are now aware that many other unsigned letters have been issued by HMRC to people as if to place an obstruction to their legal right to make a bio-fuel and claim the low tax rate. We suggest that any letters sent out to members of the public, the content of which is likely to affect the profitability or commercial viability of their work in the making of bio-fuels, are signed by an officer authorised to sign, and against whom legal action can be taken for any losses that may be incurred as a result of us following their advice, if it later turns out that their advice was invalid.

Thank you for sending us a printed and signed copy of your letter, which arrived on Saturday morning.

You discuss the meaning of the phrase 'of diesel quality'. The diesel quality sections were in HODA, and have been referred to previously by HMRC officers 'as being capable of use in a diesel engine' - in other words 'fit for intended use'. Our fuel is capable of use in a diesel engine, even at 100%, - unlike bio-diesel made by the process of transesterification that can only be used at 5% dilution with mineral diesel.

You discuss the position currently being taken by HMRC that transesterification is the only process that you are aware of. This raises a number of issues…

Firstly, we took part in consultations prior to the announcement of the Tax break for bio-fuels, and in the correspondence we asked several times for clarification that the proposed tax break will not apply solely to bio-fuels made by the process of transesterification. The government confirmed absolutely that the purpose of the tax break is not to favor any particular method, and the government was keen to encourage a broad range of options so as to explore and enable the widest range of bio-fuel technology. In particular the government referred to the Fischer Trophe method as being a process that might lend itself to the production of bio-fuels. The purpose of the tax break is certainly not to promote or artificially support wasteful or inefficient technologies. This seems very different to the position now being taken by Customs & Excise.

Secondly, we are rather dismayed by the statement that transesterification "is a process that reduces the free fatty acid content of the oil - making it suitable for use in a diesel engine". This suggests a misunderstanding of the purpose of transesterification, and also the chemical process involved. In fact quite the contrary is the case. The transesterification process can actually create free fatty acids, and in the process also creates free glycerol. This free glycerol, if allowed to remain in the fuel, will cause serious damage to engines. Our process does not shatter the lipid fat molecules with chemicals, does not create new Free Fatty Acids, and does not create free glycerol. Our fuel can therefore be used safely in compression ignition engines, because there is no risk of undesired reaction products being left in our fuel, none of the energy available in the original fat molecule is wasted in the process of forming the fuel, and there are no chemical wastes arising from the treatment of UCO for use as a fuel. It is especially relevant that the first successful compression ignition engine designed by Rudolf Diesel ran on pure peanut oil, a plant oil, and not on transesterified FAME.

The main purpose of any changes to the properties of vegetable oils for use as a fuel is to reduce the viscosity and increase the Cetane value. This can be achieved by many different techniques. We suggest that there is a an urgent need for HMRC to get up to speed on its understanding of basic chemistry, before making statements of this sort.

Thirdly, we suggest that HMRC should also be aware of the purpose of the tax break - which is not just to encourage the development and use of biofuels in the UK, it is also to comply with the requirement of EU directives, in particular EU Directive 2003/03 which specifically refers to the need for member nations to promote the use of Pure Plant Oil technology. It also requires member nations to report on what they are doing to promote the development of bio-fuels. In this context we will be writing to the EU expressing our view that the British government could not be doing more to obstruct the development and use of best bio-fuel technology.

The way vegetable oils and fats are processed to make or provide a bio-fuel should be examined in terms of the actual environmental benefits achieved. In this assessment, transesterification is wasteful and inefficient, and the use of Pure Plant Oil is more efficient, as the whole plant oil molecule is burned to release energy. The blending or Pure Plant Oils with water and other esters is probably the most efficient method. This is the basis of bio-power technology.

We are grateful for your confirmation that "transesterification" is the not the only suitable method of production, and that there may be other suitable processes, which have not been brought to your attention.

It is a matter of very great concern that Custom & Excise are not more aware of the range of processes that can be use to make a bio-fuel. In the taxation of this fuel you are the 'competent authority'. The public might therefore expect that the competent authority has a thorough knowledge of the range of processes that are being used and are being developed in the field they are charged to regulate. I have several times suggested that we might run one of our seminars for Customs Officers so that the process we use can be fully explained and understood, together with a comparison with the transesterification method. I have also included information about this to Customs Officers on many occasions. I am delighted that our local tax people have visited us on several occasions, and indeed went out of their way to educate new members of staff on the processes we use.

I run regular Introductory Seminars currently every two weeks in the Llanberis area, for people who are considering setting up to make bio-fuels. This includes a comparison of the various ways of working with biofuels. I hope we will be moving our operations soon to a new factory unit in Llandudno, and this will include a seminar area and supporting facilities so people can see an exemplar production plant in operation. I would be very happy to explain the process used to make fuel, and provide a guided tour of this plant to Customs officers.

We feel the public has a right to expect that civil servants acting in a senior capacity in government departments are adequately qualified to have a thorough understanding of the technology they are charged to regulate. If British Industry suffers losses as a result of such incompetence, then we feel we have a legitimate right for financial compensation for the time, nuisance and delay caused by any misleading advice, the effect of which is to compromise the development of our work.

In view of the above, we suggest that there is an urgent need for HMRC to be fully informed about the technicalities of this industry before they start issuing demands for tax to people who believe their product is in full conformity to the current regulations. News about this form of action by Customs officers does not paint a happy picture of the British government helping and encouraging the development of bio-fuels.

You comment on the need for all of our members to submit their returns individually, and also for each members operations to be individually scrutinised.

I confirm that our members operate as separate businesses and are individually accountable for their own tax returns. However, we all use the same method, and very soon will also all use the same materials, which will soon be supplied to our agents from the same source. We therefore expect that any approval of one agent's fuel quality will be also mean that the same quality of fuel made by another agent will also be approved.

Bio-power operates as a franchise and also as a Trade Association. It is therefore a matter of great concern if any one of our members is targeted with some new interpretation of the law, if by implication this could jeopardise the operations of all of our members. Bio-power was formed as a Trade Association to act for and protect the interests of our members.

Any laws or standards must be applied universally and uniformly throughout the UK. Sadly, we do not find this to be the case at present. The effect of this is to create a commercial uncertainty, which deprives our industry of the level of investment we would be able to attract into our business if the tax position was absolutely clear and understood by those who make biofuels and those who regulate the collection of the tax due.

This is a matter of great concern to us, and one which I have recently written about to Mr Tony Blair and Mr Gordon Brown, in no uncertain terms. It is disastrous if the action of customs officers is to frustrate the very industry that the tax break was set up to encourage.

You discuss the status of Straight Vegetable Oil when used as a fuel, quoting from HODA …

"diesel quality liquid fuel produced from biomass or waste cooking oil", and not vegetable oil itself. We have therefore concluded that vegetable oil used as a fuel substitute is not biodiesel and does not qualify for the reduced rate of duty."

I think we agree with you to some extent in so far as Used Vegetable Oil as is generally collected would not be suitable for use as a fuel. A requirement of the legislation is that the feedstock is 'used' or 'waste'. The majority of Used Vegetable Oil as collected from a catering establishment would not be immediately suitable for use as a fuel, because some form of processing would be required. We therefore agree with the premise that raw Used Vegetable Oil would not necessarily be of a marketable quality to be used immediately as a bio-fuel.

We argue that fractions of oil derived from Used Vegetable Oil can be used in some diesel engines and this may require very little processing. The Volvo we demonstrated on the 'Top Gear' TV program actually ran very well on cleaned Used Vegetable Oil.

The fuel we make for sale for use in vehicles is processed from Used Vegetable Oil, the oil is a major component but it is the raw material, the starting point, from which we make our fuel, (just like crude oil is not petrol but petrol is refined from crude oil). Used Vegetable Oil generally contains other oils and fats of animal origin, water and other materials, totally unsuitable for diesel fuel. The biopower process cleans and separates the starting material into certain fractions. These fractions are very different and have different uses within our industry. A certain fraction is separated and goes forward into further processing and is then used with other ingredients to make diesel quality fuel for vehicles. There are other fractions that do not lend themselves for use as vehicle fuels, and these are sold for use in heating or generation purposes in special engines adapted for that particular form of fuel.

To the oil selected for use in vehicles, we then blend other plant oils, esters and water, the basic purpose of which is to reduce viscosity and increase Cetane value. We also add other materials in very small quantities to provide the level of liquid engineering expected in modern diesel engines. These materials are also added to mineral diesel. We regard this as a high quality product that is as good as if not better than standard mineral diesel.

However, whilst the product we make is aimed at the majority of diesel vehicles, it is also the case that bio-fuel derived from used vegetable oil can be used in some diesel engines with very little processing, especially Mercedes, BMW, Volvo, VW and Peugeot engines. The adaptation of engines to run on simple bio-fuels is in our view the most efficient and most environmentally friendly way of working with bio-fuels.

You comment….

"Transesterification is the only method we know about that successfully converts the vegetable/animal oils to a diesel quality fuel - but we have not closed the door on other methods."

We even challenge this assumption. The very fact that the British Motor Industry will not warranty engines to run on greater than 5% FAME shows there are serious technical problems with this method of production. By only recognising and endorsing the transesterification process, HMRC are preventing and obstructing the development of much better bio-fuel technologies in Britain. Most importantly fuels made by processes other than transesterification can be used at greater proportions than 5%.

Most importantly the fuel made by transesterification is not even a truly non-fossil fuel. The purpose of developing bio-fuels as alternative to fossil fuels is to address the issue of Global Warming & Climate Change. It is well recognised that the burning of fossil fuels is the primary cause of the Green House Gas problem. This is because the burning of fossil fuel releases into the atmosphere carbon atoms that have been safely buried beneath the earth's surface for millions of years. To address the issue it is necessary to use bio-fuels, as the carbon they contain is drawn out of the atmosphere by plants last year or the year before.

However, if fuels are made from fossil derived methanol, with a loss of biologically derived glycerol, this significantly defeats the very purpose that bio-fuels are being promoted to serve. The carbon atoms in FAME are not entirely bio-derived, and what's worse, they throw away as many potential bio-carbons in the glycerol as they incorporate as fossil methanol. It is also the case that caustic soda used in this process requires a lot of energy in its manufacture.

We therefore say that the transesterification process is a very wasteful and inefficient process. It is also of limited value in achieving the aim of reducing GHG levels.

In summary, we very much appreciate your reply, and we most certainly welcome open debate about the fundamental issues involved. I do not accept the construct that our members must all correspond with HMCE individually. Bio-power is a membership organisation and is also a Trade Association representing the interests of its members. The consistency and clarity of the taxation process must be upheld, and any situation must apply universally. It is therefore a matter of very great concern to all our members if any obstruction is placed in the way of the development of our work - as has happened in the last few days with Plymouth bio-fuels.

It is also a matter of great concern that any statement made by HMCR is not only made available to all our members, but also to the many people who support and follow our work.

In these circumstances I suggest that there is a need for a meeting with members of the Oils Team at Ralli Quays at the earliest opportunity, so that I can tell you more about our process and we can clarify the position between Customs and Excise and Bio-power members. Is there any particular time of day when it would be possible to meet you and your team next week in Manchester?

Yours sincerely,
John Nicholson.
Bio-power UK Ltd.

Reply from HMRC dated 17th November to our letter about Colin Freidlos ...

Dear Mr Nicholson
Taxation of Biofuels

Thank you for your letter dated 14 October to our Mineral Oil Reliefs Centre in Newcastle about a letter sent to a member of your network, Mr Colin Friedlos. Your letter has been passed to this team as we deal with policy matters relating to Biofuels. I would like to apologise for the delay in replying.

Firstly, I must make it clear that I am unable to comment on matters affecting another taxpayer. If Mr Friedlos would like to write in directly I would be pleased to address any points he wishes to make. If an apology is due to Mr Friedlos for the issue of an unsigned letter then we would of course issue that to him.

I will now turn to the more general points that you raise:

Legislation

For excise duty purposes, "biodiesel" is defined in Section 2AA of the Hydrocarbon Oil Duties Act 1979 (HODA) as follows:

2AA Biodiesel

(1) In this Act "biodiesel" means diesel quality liquid fuel that -
(a) is produced from biomass or waste cooking oil,
(b) the ester content of which is not less than 96.5% by weight, and
(c) the sulphur content of which does not exceed 0.005% by weight or is nil.

(2) In subsection (1) -
(a) "diesel quality" means capable of being used for the same purposes as heavy oil;
(b) "liquid" does not include any substance that is gaseous at a temperature of 15°C and under a pressure of 1013.25 millibars;
(c) "biomass" means vegetable and animal substances constituting the biodegardeable fraction of -
(i) products, wastes and residues from agriculture, forestry and related activities, or
(ii) industrial and municipal waste.

Contrary to your letter, the law does specify that the fuel must be of diesel quality. It goes on to define what is meant by diesel quality.

Production Method

Your letter expresses concern that Revenue & Customs is advocating one method of Biodiesel production over another. This is not the case. However, the only method for converting vegetable oil into a fuel suitable for use in a diesel engine of which we are currently aware is "transesterification" (a chemical process that reduces the free fatty acid content of the oil, making it suitable for use in a diesel engine).

This does not mean that "transesterification" is the only suitable method of production. There may be other suitable processes which have not been brought to our attention. You do not say in your letter what the "co-solvency" method entails, therefore it is impossible for me to comment further. However, should you wish to provide full details I will be happy to do so.

If I were to comment on the suitability of your method of production that could only be applied to your own product. It should not be taken as a blanket approval for all members of the Bio-power network. It is my understanding that all members are sole proprietors, partnerships or incorporated companies. We will have to treat all applications as completely new applications from individual legal entities.

This also applies to our asking for details of the ingredients used in production of the fuel. Individual producers who apply to make entry do so in their own right, not as a member of a wider network. They are each individually responsible for making their own entries and are individually liable for any ensuing excise duty.

Straight Vegetable Oil

You also refer to our treatment of producers who are using straight vegetable oil as fuel. It may help if I refer you to the guidance we have issued (Public Notice 179E, which is available from the Revenue & Customs website www.hmrc.gov.uk).

You are correct that it is not the job of HM Revenue & Customs to police fuel standards, that is the job of Trading Standards which comes under the Department of Trade and Industry. It is however up to Revenue & Customs to ensure that revenue is protected and this involves ensuring that only fuel that fully meets the fiscal definition as defined in HODA qualifies for the lower duty rate.

The law (HODA 2AA) states that Biodiesel is a "diesel quality liquid fuel produced from biomass or waste cooking oil" (my emphasis) and not vegetable oil itself. We have therefore concluded that vegetable oil used as a fuel substitute is not biodiesel and does not qualify for the reduced rate of duty.

As stated above, transesterification is the only method we know about that successfully converts the vegetable/animal oils to a diesel quality fuel - but we have not closed the door on other methods.

I hope that you will accept this as a reply to the general concerns expressed in your letter. However, please note that any queries relating to specific taxpayers should either be routed through the individuals concerned, or they should provide written permission for us to discuss their tax affairs with you as a third party acting as their agent.

If this letter is posted on the Bio-power web-site I would request that you do not place my name or contact details on the site. If any of your members have any queries regarding Biofuels they should contact our National Advice Service on 0845 010 9000.

Yours sincerely
The name and contact details of the writer are not included by request of the writer as above.

Reply received from Downing Street ....

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Letter sent to Tony Blair, Gordon Brown, Elliot Morely, Margaret Beckett and other senior ministers....

18th October 2005

Mr Tony Blair MP.,
10 Downing Street,
Westminster,
London.

Dear Mr Blair,

I am writing to you in consequence of what is seen by many as the total incompetence of the British Customs & Excise in implementing the provisions of the tax break for bio-fuels. Any regulations set out by the government should be implemented by the relevant authorities in a manner that is consistent and uniform throughout the UK. The current situation is far from the case.

The purpose of the tax break was to foster and encourage the development of a vibrant bio-diesel industry in Britain, as a viable alternative to the use of fossil fuels. It is also required by EU legislation, and is essential if we are to meet our Kyoto commitments. Yet Britain is the only EU nation with a specific tax rate for bio-fuels. In most other nations there is no duty rate on non-fossil fuels other than VAT. EU legislation only provides for the taxation of MINERAL - i.e. fossil fuels. On this basis most other EU nations do not levy tax on non-fossil fuels as they are seen as environmentally beneficial.

Bio-power is a well established not-for-profit organisation that operates as a network of bio-fuel makers throughout the UK. Our members share the aim 'to provide bio-power fuels that are a real alternative to the use of fossil fuels'. We have developed a technique that is far superior to the trans-esterification process, otherwise used to make Bio-diesel as a Fatty Acid Methyl Ester. As well as developing an extensive network of Bio-power Agents throughout the UK we are also working with many partners overseas to develop this new technology abroad. As I travel around the world teaching this technology I am increasingly aware that Britain is falling further and further behind the rest of the world in this expanding and essential new energy sector.

We are therefore very concerned indeed to find that many of our members are now been bullied into closing down their operations because of a new 'interpretation' of the government's criteria for the tax break. The effect of this is to create an uncertainty in the investment available into the development of a viable and efficient bio-diesel industry in Britain.

Clearly, any law or ruling must be applied in a consistent and uniform manner, and the purpose of the law must be clear to those operating in the sector, and to those government departments responsible for regulating it. In the interpretation of the tax break for bio-fuels by HM Customs & Excise the situation could not be more of a mess. I am therefore writing this letter to you and other senior government ministers in the hope that we can meet to discuss the situation urgently.

So what are the specific problems?

It appears that HM Customs & Excise are approaching this measure with an inappropriate attitude, as if Biofuel makers are engaged in elicit operations. In all other EU nations the making of bio-fuels would not fall subject to taxation. Instead of helping to promote the growth in this industry, HMC&E are even obstructing public access to the very documents needed to register as legal tax payers in compliance with the law. They are also then writing bullying letters to everyone, the effect of which is to discourage many people from accessing the tax break which was intended to expand this essential industry. People engaged in the efficient small scale production of bio-fuels are most likely to be motivated by their concern for the environment. They do not deserve to be treated as if they are criminals.

Recently there appears to have been a deliberate campaign to target all small bio-fuel makers and put pressure upon them not to claim the lower tax rate, despite the fact that their fuel meets the stated criteria. The reason given for this is often as follows…

'The only method we are currently aware of is the transesterification process' and…

'It is illegal to make a bio-fuel by any other method than the transesterification method.'

The first comment is an outright admission of their own ignorance of the industry they are charged to regulate. The second is a statement of law that does not have any basis in law. There is nothing illegal about making any form of bio-fuel. The only issue is of paying the right level of taxation, and that is set by the criteria for the low rate. Statements of this sort discredit the public opinion of civil servants. It is unacceptable to have such comments coming from senior officers in government departments.

I am sure the situation is not what is intended by the government in setting up the Bio-fuels tax break, and it is not helping us meet our obligatory targets in the reduction in atmospheric carbon. The purpose of the tax break certainly is not to promote the exclusive use of the transesterification process which is very wasteful and inefficient. Our task is to promote the best possible bio-fuel technology, not the worst.

Because of the importance and urgency of the situation I ask if I can have an appointment to meet you or any other senior ministers who are responsible for this situation, to discuss a resolution to the problems I have described at the earliest opportunity.

Yours sincerely,

John Nicholson.

PS I enclose some further technical information about our process and the environmental benefits of using Pure Plant Oils and Straight Vegetable Oil as a fuel.

Message from John Nicholson to Mr Martin Butts, HMRC, 24 October 2005...

Dear Mr Butts,
Thank you for your message.
I'll cut into your text in blue.....

-----Original Message-----
From: Butts, Martin {W BAC} [mailto:martin.butts@hmrc.gsi.gov.uk]
Sent: 24 October 2005 10:31
To: 'jn@bio-power.co.uk'
Subject: RE: 'It is illegal to make a bio-fuel by any other method than th e transesterification method.'

Dear Mr Nicholson.
Firstly my apologies as I was not in work last week.
No matter. I was very concerned to contact you as quickly as possible.

I am slightly confused as to where you obtained my e-mail address as it is not for public distribution
I was given it by the telephonist, who tried hard to help me in every other way.

and as you can understand I cannot discuss in full the conversation I have had with Mr Francis,
Mr Francis is one of our members. The impression he had as a result of the meeting with you was that every obstruction was being made to discourage him form doing what he intends to set up within the bio-power network. There are now several hundred members of the Bio-power network in the UK who are successfully making fuel by our technology. We are also engaged as consultants on many large scale projects overseas. To gather information from HM Customs officers that seemed so contrary to information previously given to our members who are investing a great deal of their time and money into new bio-power operations is a serious matter. It is very important that any governmental ruling is interpreted in a manner that is totally consistent and uniform throughout the UK.

but would like to reiterate that at no point did I confirm that it was "illegal to use Biofuel" only that to be able to use such fuels on public roads it should be purchased from an authorised producer or by registering with HMRC as a user/producer himself and paying the applicable rates of duty.
The comment that was reported to me was on the following lines...

'It is illegal to use any bio-fuel other than that produced by the transesterification method'.

It is this issue that we are extremely concerned about. Transesterification is in our view the most inefficient and wasteful way to make a quality bio-fuel. The bio-fuel it is also not a totally non-fossil fuel because the carbon atoms in the methanol is derived from fossil hydrocarbon.

This information should be consistent throughout HMRC and I can only surmise that after a long discussion with Mr Francis that wires have been crossed.
I am receiving very many messages and letters from disheartened people who are receiving similar discouragement from HM Customs officers. If they are members of Bio-power I am able to help them directly. Because of the extent of this situation I have written in strong terms to all senior ministers about the situation and I am asking for a meeting to discuss the situation. There is also a reception in parliament on this issue next week. If Britain is to take any useful role in the development of better bio-fuel and bio-energy technology then we must ensure that the way ahead is not blocked by inconsistent legislation or by the arbitrary interpretation of it by government regulators.

I am still not fully aware as to whether or not Mr Francis wishes to register as a user/producer of biofuel or whether he wants to use "straight vegetable oil" but I sent him the appropriate application/registration form after our conversation so he can make the decision for himself.
Mr Francis wishes to register to pay Excuse Duty as a producer of bio-fuel entitled to claim the 20p tax break, for fuels meeting the criteria not less than 96.5% ester content by weight, not greater than 50 ppm sulphur content by weight, and derived from used or waste feedstock. The process he intends to use is the same as that used by many other Bio-power members who work by co-solvency technique, blending cleaned used vegetable oil with other plant oils and esters, bio-ethanol and water to achieve the best possible burn characteristic.

There is no legal requirement for oils to undergo the wasteful and most UNgreen process of transesterification in order to meet these criteria. In fact we would ask why the criteria that feedstock must be used or waste also applies to the methanol and caustic soda. And also why transesterified esters made from methanol containing fossil based carbon are being promoted as an alternative to fossil fuel? Clearly, the whole situation is a total mess.

I hope this make the matter more clear.
It will if you can confirm in writing that there is no legal requirement that bio-fuels being made and sold under terms of the 20p tax break must undergo the process of transesterification. Pure plant oils, if blended to be used in the same way as mineral diesel equally meet the tax break criteria, and should therefore be fully entitled to claim the 20p tax break. Fuels made from pure plant oils do not contain any fossil derived carbon atoms.

I attach a document that was included in the pack I sent to senior ministers entitled 'basic technical points'.

Yours sincerely,
John Nicholson.
01286 830312

-----Original Message-----
From: John Nicholson [mailto:jn@bio-power.co.uk]
Sent: 14 October 2005 18:12
To: martin.butts@hmce.gsi.gov.uk
Cc: aquabus@tiscali.co.uk
Subject: 'It is illegal to make a bio-fuel by any other method than the transesterification method.'

Dear Martin,

I have been trying to contact you throughout out Friday by telephone through the 0845 0109000 number, and without success. However, the receptionist did give me your e-mail so I can get in touch with you by Monday.

My reason to contact you is with regard to advice given by you to Mr Michael Francis, when he was asking for information about the taxation of bio-fuels in the UK. Mr Francis is member of Bio-power, and he is intending to make bio-power fuels as part of the extensive Bio-power UK Network. He reported to me that in the conversation, you made a remark on the following lines...

'It is illegal to make a bio-fuel by any other method than the transesterification method.'

This is a serious legally defining comment, and it contravenes everything I am aware of in terms of the actual legal regulations in place. The implication of the statement, if so made, is of very considerable importance.

I was involved in the consultations that took place before the tax break was announced by Mr Gordon Brown, and I am aware of all the issues that were discussed. In particular I have a reply from the Treasury regarding the criteria that may be applied to qualify for the lower taxation rate, the purpose of which was to encourage and foster a viable British bio-fuel industry. It was made very clear in correspondence that the purpose of the provision was not to favour or promote any one bio-fuel technology. There was a desire to promote both excellence and innovation. The purpose of the tax break is not to compensate those who use the inefficient process of transesterification.

In following consultations there has been discussion about the various technologies, and it is very evident that the transesterification method is probably the most wasteful and inefficient technique. Bio-diesel made by as a Fatty Acid Methyl Ester is not even a truly non-fossil form of bio-fuel, because the carbon in the methanol used in the process is derived from the fossil fuel industry. It is therefore counter productive in terms of the primary purpose in promoting the creation and use of bio-fuels as a way to address the issues of Climate Change and Global Warming. The best form of bio-fuel in terms of both the economic cost and the environmental benefits achieved is the use of Pure Plant Oils as a fuel. This is also specifically referred to and prioritised in the EU Directive 2003/30/EC of 8th May 2003, as the use of Pure Plant Oils as a fuel is seen by those in Europe - especially Germany - as the most effective and environmentally advantageous system in terms of addressing the issues of Climate Change. Bio-power technology is an even more developed and refined method using blend of Pure Plant Oils and esters to achieve the best possible burn characteristic. It is the optimum in Bio-fuel technology.

In view of this, I find any comment made by an officer of HM Customs & Excise suggesting that any bio-fuel technology other than that of transesterification is a most serious matter. There are now over 1,300 members of the Bio-power Network, many of whom are already making Bio-power fuels and are already registered and approved by HMC&E. This represents a very considerable investment into the industry. Bio-power UK is a not-for-profit membership company that promotes the best form of bio-technology, and runs a program of seminars for people wishing to become involved as local bio-power agents.

As far as I am aware there has been no revision of the legal criteria set out in the budget. There have been several changes in the guidance issued by HMC&E and we have responded to the consultations. There has never been any new law or ruling the effect of which would be to deem the creation of any bio-fuel by a process other than by transesterification, illegal.

It is very important that any regulations are interpreted and implemented throughout the UK in a manner that is consistent and uniform. It is also important that HMC&E do not provide any information to the public that may have the effect of preventing or discouraging them from getting involved in this form of business. It seems to me that there is very considerable variation in the way that the same laws are applied throughout the UK, and this level of variation is doing great damage to the potential investment that this new industry needs. It is a matter I am currently addressing through ministerial channels.

I therefore ask that you provide me with firm legal information to support your position, or that you accept my view that there is no required or preferred process for the creation of bio-fuels, and that any bio-fuel may be charged at the lower tax break rate if it meets the criteria set out in the budget statement, namely, derived from used or waste oil, with an ester content not less than 96.5% by weight, and a sulphur content not greater than 0.05% by weight. In this regard cleaned used vegetable oil is 100% a true ester of glycerol. It therefore meets the criteria. Anyone using pure vegetable oil as a fuel can pay tax at the lower rate so long as the feedstock used is not bought as new food grade oil from the supermarket shelf, as this material does not meet the criteria of being 'used' or 'waste'.

Because of the importance of this situation with the investment of several hundreds of people into the development of this technology I hope you will reply to me and to Mr Michael Francis as quickly as possible.

Yours sincerely,
John Nicholson.
Bio-power UK Ltd.
01286 830312

Another letter sent by a biofuel maker to an officer from HMRC...

Dear Mr Walker-Smith,

I am referring to your letter dated 4/10/05.

In your letter you state that because my 'vehicle has been adapted to run on vegetable oil (heater added)', the fuel I produce 'does not qualify as Biodiesel'.

This is incorrect for several reasons.....

The fact that my car (which by the way I no longer own) has been fitted with a fuel heater implies nothing whatsoever about the specifics of the fuel produced by myself. Many cars on the roads today are fitted with heated fuel filters as standard. The characteristics of the fuel are defined by the fuel itself, not by the car it is used in. At times, I have used my fuel in cars that have not been modified in any way. As per your letter, this would make my fuel a 'Diesel quality fuel'.

Likewise many cars - by design - pre-heat Diesel fuel to assist ignition in cold weather. Does that mean that not even Diesel fuel itself is of Diesel quality? Clearly not.

It is obvious that the term 'Biodiesel' cannot be defined - or worse: interpreted - in the manner that you have deployed.

You also claim in your letter that the fuel I produce cannot be used without modifications to the vehicles it is used in. This is also not correct, see the aforementioned reasons. In my case it was simply a personal preference to adapt my car but it was by no means a necessity. The orignal Diesel engine was designed to run on peanut oil, not Diesel!

The business brief quoted also contains the actual legilative definition of Biodiesel and this is the definition that is important and which you have failed to mention in your letter:

"Biodiesel" means diesel quality liquid fuel produced from biomass or waste cooking oil:

- the ester content of which is not less than 96.5% by weight; and

- the sulphur content of which does not exceed 0.005% by weight, or is nil.

The type of 'Biodiesel' I produce is liquid and can be produced from either straight vegetable oil (SVO) which is effectively biomass (whose definition includes products from agriculture), or waste cooking oil (WVO), which is the same as SVO except for the fact that it has been heated in a fryer previously. Its Ester content is greater than 96.5% by weight and it's Sulphur content is less than 0.005% by weight.

To prove these facts and to avoid any further confusion I enclose vegetable oil test results for your attention.

Therefore and per HM R&C's own definition, the fuel produced by myself constitutes 'Biodiesel' and attracts a reduced rate of duty at 27.1p/litre.

I have also obtained a copy of the relevant legislation covering biodiesel, namely HODA 1979 section (2)(a) as amended by the Finance Act 2002, and, after careful scrutiny, can find no criteria that exclude vegetable oil in the fiscal definition of Biodiesel.

For the aforementioned reasons I believe to be entitled to the reduced rate of duty and don't have to pay the 47.1p/litre duty rate. I do not plan on changing my production methods.

I believe that your letter was a rather crude attempt to try and push me into paying more duty than I am obliged to. The oils department above all others should really know better and I believe that anyone who is not as well informed as I am may be misled by what you tell them. It also seems to be the case that members of the public get different answers on this issue depending on which oils team they speak to - the Leicester Oils Team now apparently at the tougher end of the scale.

I am astounded about how hard your institution makes it for small fuel producers like myself to produce and use Biodiesel. Driving on vegetable oil has a substantially lower sulphur dioxide (SO2) and carbon dioxide (CO2) footprint than mineral diesel. You are quite clearly not following EU-directives which are designed to encourage use of alternative, greener fuels. I enclose a copy of the DIRECTIVE 2003/30/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL for your attention.

Needless to say that our UK Government has agreed to follow these directives... What exactly was the reason for the introduction of a reduced duty rate if not a signal for people like myself to produce such fuels?

I have also taken this matter up with my MP, whom I have asked to look into the relevant legislation and the conflicting position currently held by HM Customs & Revenue.

May I take this opportunity to kindly ask you to send me a copy of your code of practice (Notice 1000).
Yours sincerely....

11th October 2005

Mike Jackson,
Hydrocarbon Oil Auditor
Local Compliance
Custom House
King George Dock
Hull, HU9 5PW

Dear Mr Jackson,

The Taxation of Biofuels

I have been contacted by Mr Chris Smith from Barton-on-Humber, Hull, who I gather you visited recently regarding his registration to pay the tax due on bio-fuel he will be making. It seems from the discussion that your approach was far from being one of support and helpfulness as we have come to expect from Customs officers.

We are particularly concerned that there seems to be a new interpretation of the legal situation, which is based upon a position stated as follows…

'The only method we are currently aware of is the transesterification process'

The legislation sets out that in order to attract the 20p per litre tax break the bio-fuel must meet the following criteria…

It must be derived from used or waste feedstock
It must have an ester content of at least 96.5% by weight
It must not have a sulphur content greater than 0.05% by weight.

In the consultations that took place prior to the announcement of the 20p per litre tax break it was made very clear to us that there would be no requirement that the tax break would only apply to fuel created through the transesterification process. The purpose of the tax break is to encourage and foster a broad range of alternative bio-fuel technologies. For many years Customs and Excise Officers have met and discussed technologies with many members of the Bio-power Network, and have approved this technology, generally referred to as the co-solvency method. It has many benefits over the transesterification method in terms of greater efficiency and also the environmental benefits achieved.

The legislation does not say that the fuel must be of diesel quality, but it is implied by the fact that this is the purpose to which the bio-fuel will be put. The test for 'of diesel quality' is that it must be fit for purpose for use in a diesel engine. The regulatory body is Trading Standards. It is also accepted that bio-diesel made by the transesterification method does not meet the warranty requirements of many British manufacturers, and therefore it is regarded as acceptable if it can be used in a dilution of 5% with mineral diesel. The fuel made by Bio-power members can be used at 100% in most diesel engines, and as there is no issue of free glycerol it does not fall into conflict with engine warranty conditions.

The fuel made by Bio-power members meets the fiscal criteria for the 20p tax break for bio-diesel. It is derived from used or waste feed stock. The primary ingredient is therefore 100% true ester of glycerol. I can send a copy of information provided by Cargill's showing that the sulphur content of rape seed oil is significantly lower than the limits required. This information has been sent to your department many times before, and there should no longer be any need for each individual maker of bio-fuels to prove this point.

I am also aware that letters have been sent by Customs & Excise to other British producers of bio-fuels made from pure plant oils accepting that their product meets the criteria for the lower tax rate, the purpose of which is to encourage and foster the development of a viable bio-diesel industry in Britain. If pure plant oils meet the criteria then so also do blended plant oils. Nowhere in the legislation, or in the guidance associated with it, is there any requirement that fuel produced under the 20p tax break must undergo the process of transesterification. If officers are expressing a view that this is the only viable process then it clearly demonstrates a total lack of understanding of the industry they are charged to monitor.

This is a matter of utmost importance because any vagueness in the interpretation of the law will result in an uncertainty in the emerging industrial sector, and this will result in a loss of confidence and thereby a loss of much needed potential investment into this sector. In this way Customs & Excise are actually undermining the whole purpose of the tax break for bio-fuels in terms of developing a viable and vibrant British bio-fuel industry. The role of Customs and Excise is not to attempt to promote the interests of those who support one form of technology over those who use another. The role of HM Customs & Excise is to assist the proper payment of taxes that are due, and ensure that the tax payable is properly accounted for. It is therefore essential that any position taken by officers is consistent and uniform throughout the UK. Our current experience is that this is far from the case.

It is the view of Bio-power members that the production of Bio-diesel by the transesterification as a Fatty Acid Methyl Esther (FAME) is an inefficient and wasteful process. It results in a bio-fuel that is not a fully non-fossil fuel because the carbon in the methanol is derived from the fossil fuel industry. It is wasteful because much of the potential energy in the fuel is removed in the form of glycerol that itself poses a waste disposal problem. It results in a smaller volume of fuel than that of the fat feedstock, and the fuel itself is less powerful than mineral diesel.

The method Mr Smith will be using is the same as that already being used and approved by many Bio-power fuel operators throughout the UK. We make a fuel by the process of co-solvency, and it results in a volume of fuel greater than that of the fat feedstock, and without the creation of any waste. In our process the total energy audit of the feedstock is made available for use a fuel without any waste. We do not use any materials derived from the fossil fuel industry. Our fuel can be more powerful than mineral diesel. The form of fuel we make is very much supported by those in Europe who are pressing for more environmentally sustainable methods of bio-fuel manufacture.

We are very concerned to ensure that everything possible is being done by the government to help address the issues of Global warming & Climate Change. It is very evident to me in the work I do to promote the Bio-power technology around the world, that Britain is falling further and further behind the rest of the world in the development of better bio-fuel and bio-energy technology. We are therefore very concerned if situations arise where our members feel that they are being dissuaded from setting up in this important and expanding sector will not in any way help Britain to meet the targets made under the Kyoto agreement, or the requirements of European legislation, or the targets we have also set for ourselves in order to set an exemplar standard in the reduction of atmospheric carbon emissions.

I therefore ask that you confirm in writing at the earliest opportunity that Mr Smith's fuel will be excepted as conforming to the fiscal definition for bio-diesel which is subject to the low tax rate, as set out in legislation. We also hope that you will receive this letter as a sincere warning that we will take legal and political action if we find evidence of any form of discrimination on the part of Customs officers that may discourage or frustrate people in their work to provide legitimate bio-fuels that meet the fiscal criteria for the low tax rate.

Yours sincerely,

John Nicholson.
Founder and company Secretary,
Bio-power UK Ltd.

11th October 2005

To the Director or Senior Officer,
Regional Business Services North,
Mineral Oil Reliefs Centre,
Dobson House,
Regent Centre,
Gosforth, Newcastle-upon-Tyne, NE3 3PF.

Dear Sir / Madam,

The Taxation of Biofuels

I have been sent a copy of an unsigned letter dated 05 October 2005, sent to Mr Colin Friedlos, who is one of our members.

Firstly, I am concerned to see a letter of such importance from a Government body that is not signed by an officer holding the responsibility to sign and thereby take full responsibility for the content and legal implications of the information it contains.

Secondly, I am concerned that the letter appears to be offering a new interpretation of the legal situation, which is therefore open now to debate. In particular it states ….

'The only method we are currently aware of is the transesterification process'

Where has the writer been for the last five years?

The legislation sets out that in order to attract the 20p per litre tax break the bio-fuel must meet the following criteria…

· It must be derived from used or waste feedstock

· It must have an ester content of at least 96.5% by weight

· It must not have a sulphur content greater than 0.05% by weight.

This is a matter of utmost importance because any vagueness in the interpretation of the law will result in an uncertainty in the emerging industrial sector, and this will result in a loss of confidence and thereby a loss of much needed potential investment into this sector. In this way Customs & Excise are actually undermining the whole purpose of the tax break for bio-fuels in terms of developing a viable and vibrant British bio-fuel industry. The role of Customs and Excise is not to attempt to promote the interests of those who support one form of technology over those who use another. The role of HM Customs & Excise is to assist the proper payment of taxes that are due, and ensure that the tax payable is properly accounted for. It is therefore essential that the position taken by officer is consistent and uniform throughout the UK. Our experience is that this is far from the case.

The method Mr Friedlos will be using is the same as that already being used and approved by many Bio-power fuel operators throughout the UK. We make a fuel by the process of co-solvency, and it results in a volume of fuel greater than that of the fat feedstock, and without the creation of any waste. In our process the total energy audit of the feedstock is made available for use a fuel without any waste. We do not use any materials derived from the fossil fuel industry. Our fuel can be more powerful than mineral diesel.

In view of the above I must inform you that both Mr Friedlos and I will be contacting our MPs to raise the matter of the content of this letter with the Treasury, and I will also be seeking advice from members of the House of Lords known to be enthused by the need to address the issues of Global warming & Climate Change. It is very evident to me in the work I do to promote the Bio-power technology around the world, that Britain is falling further and further behind the rest of the world in the development of better bio-fuel and bio-energy technology. Letters of this sort to dissuade people from setting up in this important and expanding sector will not in any way help Britain to meet the targets made under the Kyoto agreement, or the requirements of European legislation, or the targets we have also set for ourselves in order to set an exemplar standard in the reduction of atmospheric carbon emissions.

I therefore expect you to reply promptly to this letter with an apology for the issue of an unsigned letter, and with a complete withdrawal from the position that only fuel created by the transesterification process will meet the criteria for the lower tax rate. There is no legal basis for this position other than the writer's own stated ignorance.

This letter and the original letter will be circulated to others who may be interested in the press and in the Bio-fuel sector. It will also be published on the Bio-power web site so others may see and follow the correspondence that ensures.

Yours sincerely,

John Nicholson.
Founder and company Secretary,
Bio-power UK Ltd.

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