Proposal for a COUNCIL DECISION authorising the United Kingdom to apply reduced levels of taxation to motor fuels consumed on the islands of the Inner and Outer Hebrides, the Northern Isles, the islands in the Clyde and the Isles of Scilly, in accordance with Article 19 of Directive 2003/96/EC
Date: 2011-09-06
Institutions: European Commission
Subjects: derogation from EU law, diesel fuel, fuel tax, petrol, regions of the United Kingdom, tax exemption

EUROPEAN COMMISSION 

Brussels, 6.9.2011 
COM(2011) 532 final 

2011/0232 (NLE) 

Proposal for a 

COUNCIL DECISION 

authorising the United Kingdom to apply reduced levels of taxation to motor fuels 
consumed on the islands of the Inner and Outer Hebrides, the Northern Isles, the islands 
in the Clyde and the Isles of Scilly, in accordance with Article 19 of Directive 
2003/96/EC 

 
 
  
 
EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

Taxation  of  energy  products  and  electricity  in  the  Union  is  governed  by  Council  Directive 
2003/96/EC1 (hereafter referred to as the “Energy Taxation Directive” or the “Directive”). 

Pursuant to Article 19(1) of the Directive, in addition to the provisions foreseen in particular 
in  its  Articles  5,  15  and  17,  the  Council,  acting  unanimously  on  a  proposal  from  the 
Commission, may authorise any Member State to introduce further exemptions or reductions 
in the level of taxation for specific policy considerations. 

The objective of this proposal is to allow the United Kingdom of Great Britain and Northern 
Ireland  (UK)  to  introduce  a  reduced  rate  of  excise  duty  on  motor  fuels  (namely  petrol  and 
diesel) in all the islands of the Inner and Outer Hebrides, the Northern Isles, the islands in the 
Clyde  (all  off  the  coast  of  Scotland),  and  the  Isles  of  Scilly  (off  the  south  west  coast  of 
England).  According  to  the  information  provided  by  the  UK  the  price  of  fuel  in  the  areas 
which are to benefit from the measure is on average GBP 0,10 (app. EUR 0,11) more per litre 
than in other parts of the country. Higher prices in these areas are due to higher transport and 
distribution  costs,  and  low  population.  The  objective  of  the  measure  is  to  offer  some 
mitigation against the high costs of motor fuels in the specified areas. 

The request and its general context 

Article 19(1)  of  the Directive envisages that the Council, acting unanimously on  a proposal 
from  the  Commission,  may  authorise  any  Member  State  to  introduce  further  exemptions  or 
reductions in the level of taxation for specific policy considerations. 

By  letter  dated  23  March  2011,  under  Article  19  of  the  Directive,  the  UK  authorities  have 
informed  the  Commission  that  they  intend  to  apply  a  reduced  rate.  The  reduced  rate  of  the 
excise duty on fuel will be GBP 0,05 (app. EUR 0,06) per litre lower than the standard rate in 
the UK (GBP 0,59 or app. EUR 0,68). This would mean that the reduced rate would still be 
far  above  the  current  EU  minimum  per  1000  litres  of  EUR 359  for  unleaded  petrol  and 
EUR 330 for gas oil. 

The UK has requested for the reduction to be authorised for a period of six years, which is the 
maximum period indicated in Article 19(2) of the Directive. 

According to the UK authorities, the price of fuel in the Scottish islands is around GBP 0,10 
(app. EUR 0,11) per litre higher than the average for the rest of the UK. In the Scilly Isles it is 
even higher at around GBP 0,25 (app. EUR 0,28) per litre above the UK average. A GBP 0,05 
(app.  EUR 0,06)  per  litre  reduction  would  not  cover  the  full  price  difference,  but  would 
provide consumers with some compensation for the higher price which they have to bear.  

The  high  price  is  caused  by  the  additional  costs  of  selling  fuel  in  these  regions.  The  UK 
authorities quote two key reasons for these higher costs:  

1 

Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for taxation 
of energy products and electricity, OJ L 283 of 31.10.2003 p. 51. 

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1.  Higher  transport  and  distribution  costs  to  deliver  fuel  to  the  islands,  caused  by  extra 
shipping  /  truck  transportation  costs  (longer  distance  and  time),  ferry  costs,  terminal 
operation  costs  and  supplier  premiums  associated  with  the  delivery  of  low  volumes  of 
fuel. In contrast, all mainland areas of England and Wales are within 100 miles (app. 160 
km) of at least one refinery and can be served directly by road tankers. Transport costs to 
the Scottish islands are estimated to be at least GBP 0,03 per litre higher than on mainland 
Scotland. 

2.  The  low  population  served  (82 000  people  aged  16  or  over  across  100  islands)  and  low 
volume  of  fuel  sold  per  site  means  that  fixed  costs  need  to  be  spread  across  a  small 
volume of sales. To put this in context: there are 65 fuel filling stations in total in these 
areas. Fixed costs for staff, rent, rates, heat, light, water, maintenance and repair must be 
factored into the final pence per litre pump price. The average volume of fuel sold per site 
on the Shetlands, Orkneys and Hebrides varies between 0,25 and 0,6 million litres a year, 
compared with 3,8 million litres for the rest of Scotland. In order to cover costs of running 
a fuel station, sales of 0,25-0,6 million litres would require a margin of GBP 0,07-0,15 per 
litre compared with a margin of GBP 0,033 per litre on sales of 3,8 million litres. 

The  disadvantage  represented  by  the  higher  prices  induced  by  the  increased  per  unit  cost  is 
important  for  the  local  population,  according  to  the  UK  authorities,  because  many  of  the 
residents have to travel significant distances to reach their nearest urban centre, as they often 
depend on private transport and because the areas benefiting from the measure are relatively 
low income areas.  

Operation of the measure 

In  the  UK,  excise  duty  on  road  fuels  is  accounted  for  at  the  point  when  the  fuel  leaves  the 
refinery, when it is imported or when it leaves an excise warehouse. At this point it would be 
difficult to identify the amount of fuel destined for eligible regions. 

Therefore, the relief will be given at the point of sale on the eligible islands, thus avoiding any 
risk  arising  from  diversion  of  reduced  rate  fuel.  Fuel  retailers  on  the  islands  would  be 
registered  with  HM  Revenue  and  Customs  (HMRC)  as  approved  retailers  and  would  be 
required to reduce the price of a litre of fuel by the amount of the duty relief. They would in 
turn be entitled to claim a refund of duty from HMRC, on a periodic basis, based on the litres 
of fuel sold. 

Scope 

The teritorial scope of the measure consists of all the islands of the Inner and Outer Hebrides, 
the  Northern  Isles,  the  islands  in  the  Clyde  (all  off  the  coast  of  Scotland);  and  the  Isles  of 
Scilly (off the south west coast of England). The measure is aimed at private individuals but 
all  purchases,  including  commercial  will  benefit  from  the  lower  tax  rate.  According  to  the 
information provided by the UK authorities of those vehicles licensed in the islands in 2009, 
85 % were privately owned and 15 % were company owned. 

Arguments of the UK authorities concerning the impact of the measure on the internal market 

The UK authorities do not think that the measure would affect the proper functioning of the 
internal market. The largest organisations on the islands are public sector bodies such as local 
councils and health service providers. There is a wide spread of companies on the islands, but 

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they  tend  to  have  lower  turnover  than  on  average  across  the  UK.  According  to  the  UK 
authorities,  companies  in  the  areas  concerned  have  average  turnover  of  around  GBP 1,4 
million compared with a UK average of around GBP 5,7 million. 

The  United  Kingdom  underlines  that  the  relief  does  not  cover  the  full  cost  differential 
between the islands and the UK mainland so it would be uneconomic for people to travel to 
the islands from the mainland to take advantage of the special scheme. 

Moreover,  according  to  the  United  Kingdom,  undertakings  benefitting  from  the  measures 
represent only small competitors in the markets in which they operate. 

Existing provisions in the area of the proposal 

Council  Directive  2003/96/EC  of  27  October  2003  restructuring  the  Community  framework 
for the taxation of energy products and electricity. 

Assessment of the measure under Article 19 of Directive 2003/96/EC 

Specific policy considerations 

Article 19(1), first subparagraph, of the Directive reads as follows:  

"In addition to the provisions set out in the previous Articles, in particular in Articles 
5, 15 and 17, the Council, acting unanimously on a proposal from the Commission, 
may  authorise  any  Member  State  to  introduce  further  exemptions  or  reductions  for 
specific policy considerations." 

The measure envisaged by the UK consists in reducing excise duty on motor fuels supplied in 
certain  parts  of  its  territory  namely  all  the  islands  of  the  Inner  and  Outer  Hebrides,  the 
Northern Isles, the islands in the Clyde (all off the coast of Scotland), and the Isles of Scilly 
(off  the  south  west  coast  of  England).  The  aim  is  to  bring  pump  prices  in  these  territories 
closer to the UK average. The higher per unit costs and thus pump prices in these areas are 
due to higher transportation and distribution costs and lower economies of scale. 

It  can  be  concluded  that  the  wish  to  apply  a reduced  excise  duty  rate  on  motor  fuels  in  the 
areas  concerned  on  account  of  their  specific  geographical  conditions  is  based  on  specific 
policy considerations. 

Consistency with the other policies and objectives of the Union 

The  aim  of  the  measure  is  to  partly  counterbalance  the  higher  per  unit  cost,  and  thus  pump 
prices, of fuel in the islands concerned, through a direct duty relief at the point of sale. 

The measure is limited to what is needed to this effect. In particular, the relief is confined to 
the (relatively small) amount of fuel sold on the islands. 

Moreover, the amount of the relief remains below the additional costs of selling fuel in these 
regions and, by the same token, below the difference between the fuel prices applied there and 
those applied on the mainland. 

In this regard, the Commission notes that the excise duty rate will be reduced by GBP 0,05 
per  litre  of  product.  Yet,  according  to  the  information  provided  by  the  United  Kingdom 

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authorities, the additional transportation costs for the territories covered are GBP 0,03 per litre 
higher than the UK average, and the costs of running gas stations are estimated to be higher 
resulting  in  premiums  of  approximately  GBP 0,07  to  0,15  per  litre,  compared  to  the  UK 
average of GBP 0,033 per litre. 

As a result, the fiscal incentive to use energy efficiently is maintained at a level at least equal 
to the one prevailing on the mainland. 

Finally,  despite  the  relief,  the  tax  burden  borne  by  fuel  consumed  in  the  geographic  areas 
concerned  will  remain  well  above  the  minimum  levels  of  taxation  set  out  in  Directive 
2003/96/EC. 

It can thus be concluded that the measure is compatible with the health, environment, energy 
and transport policies of the Union.  

Under  the  circumstances  described,  it  also  appears  acceptable  in  view  of  the  proper 
functioning of the internal market and the need to ensure fair competition. In particular, due to 
the insular nature of the areas to which it applies and the moderate reduction in the rate, it is 
not  expected  that  it  will  lead  to  changes  in  fuel  consumption,  through  the  attraction  of 
consumers from outside these areas. 

Period  of  application  of  the  measure  and  development  of  the  EU  framework  on  Energy 
Taxation 

The  Commission  suggests  that  the  period  of  application  is  set  to  the  maximum  allowed  by 
Directive 2003/96/EC, i.e. six years. This period seems appropriate in order to allow the UK 
authorities to gather information to assess the results of the measure and provide businesses 
and consumers benefiting from the measure with a sufficient degree of certainty. 

However,  in  order  not  to  undermine  future  general  developments  of  the  existing  legal 
framework, it is appropriate to provide that, should the Council, acting on the basis of Article 
113 of the Treaty, introduce a modified general system for the taxation of energy products to 
which the present authorisation would not be adapted, this Decision shall expire on the day on 
which those modified rules become applicable. 

More concretely, reference is made to the proposal submitted by the Commission on 13 April 
2011 [COM(2011)169]. According to this proposal, energy taxation would be split into two 
components.  This  system  would  be  different  from  the  one  of  Directive  2003/96/EC  as  it 
currently stands and on which the present authorisation is based. 

Should  the  Council  adopt  such  a  new  system  and  should  the  Commission  consider  that  the 
authorisation  proposed  herewith  is  still  warranted,  it  would  examine,  positively  and  in  a 
timely  manner,  any  request  from  the  UK  for  a  similar  authorisation  adapted  to  that  new 
system, so as to provide for the continuity intended by Article 2, paragraph 1, of the present 
proposal. 

State Aid rules 

After the reduction envisaged by the UK authorities, the tax rates on petrol and diesel in the 
regions  concerned  will  still  respect  the  minimum  level  of  taxation  pursuant  to  Article  7  of 
Directive  2003/96/EC.  The  measure  therefore  falls  under  the  so-called  General  Block 

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Exemption Regulation (Regulation (EC) No 800/2008)2 and is, by consequence, exempt from 
the prior notification requirement. 

2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENTS 

Consultation of interested parties 

This proposal is based on a request made by the UK and concerns only this Member State. 

Collection and use of expertise 

There was no need for external expertise. 

Impact assessment 

This proposal concerns an authorisation for an individual Member State upon its own request. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

The proposal aims at authorising the UK to derogate from the general provisions of Council 
Directive 2003/96/EC and to apply, within defined limits, differentiated levels of taxation to 
gas oil and unleaded petrol.  

Legal basis 

Article 19 of Council Directive 2003/96/EC. 

Subsidiarity principle 

The field of indirect taxation covered by Article 113 TFEU is not in itself within the exclusive 
competence of the Community within the meaning of Article 3 TFEU. 

However,  the  exercise  by  Member  States  of  their  concurrent  competences  in  this  field  is 
strictly  circumscribed  and  limited  by  existing  Community  law.  Pursuant  to  Article  19  of 
Directive  2003/96/EC,  only  the  Council  is  empowered  to  authorise  a  Member  State  to 
introduce  further  exemptions  or  reductions  within  the  meaning  of  that  provision.  Member 
States cannot substitute themselves for the Council.  

The proposal therefore respects the principle of subsidiarity.  

Proportionality principle 

The proposal respects the principle of proportionality. The tax reduction does not exceed what 
is necessary to attain the objective in question. 

2 

Commission  Regulation  (EC)  No  800/2008  of  6  August  2008  declaring  certain  categories  of  aid 
compatible with the common market in application of Articles 87 and 88 of the Treaty (General block 
exemption Regulation), OJ L 214, 9.8.2008. 

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Choice of instruments 

Instrument proposed: Council Decision. 

Article 19 of Directive 2003/96 makes provision for this type of measure only. 

4. 

BUDGETARY IMPLICATION 

The  measure  does  not  impose  any  financial  and  administrative  burden  on  the  Community. 
The proposal therefore has no impact on the Community budget. 

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2011/0232 (NLE) 

Proposal for a 

COUNCIL DECISION 

authorising the United Kingdom to apply reduced levels of taxation to motor fuels 
consumed on the islands of the Inner and Outer Hebrides, the Northern Isles, the islands 
in the Clyde and the Isles of Scilly, in accordance with Article 19 of Directive 
2003/96/EC 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union,  

Having  regard  to  Council  Directive  2003/96/EC  of  27  October  2003  restructuring  the 
Community framework for the taxation of energy products and electricity3, and in particular 
Article 19(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

By letter of 23 March 2011 the UK requested authorisation to apply a reduced rate of 
excise  duty  on  gas  oil  and  unleaded  petrol  pursuant  to  Article  19  of  Directive 
2003/96/EC  on  the  islands  of  the  Inner  and  Outer  Hebrides,  the  Northern  Isles,  the 
islands in the Clyde (all off the coast of Scotland); and the Isles of Scilly (off the south 
west coast of England). 

In  these  areas,  the  prices  of  gas  oil  and  unleaded  petrol  are  higher  than  the  average 
prices in the rest of the UK territory, placing local fuel consumers at a disadvantage. 
The  price  difference  is  due  to  additional  per  unit  costs  induced  by  the  geographic 
location of the islands, their low population numbers and the delivery of relatively low 
volumes of fuel. 

The tax reduction is no larger than what is necessary to compensate for the additional 
per unit costs borne by the consumers in the geographical areas concerned. 

The reduced rates of taxation will be above the minimum rates laid down in Article 7 
of Directive 2003/96/EC.  

In  view  of  the  insular  nature  of  the  areas  to  which  it  applies  and  the  moderate 
reduction  in  the  rate,  the  measure  will  not  give  rise  to  any  movement  specifically 
linked to the supply of fuel. 

3 

OJ L 283, 31.10.2003, p. 51. 

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(6) 

(7) 

Consequently,  the  measure  is  acceptable  from  the  point  of  view  of  the  proper 
functioning of the internal market and of the need to ensure fair competition and it is 
compatible  with  the  European  Union’s  health,  environment,  energy  and  transport 
policies. 

It follows from Article 19(2) of Directive 2003/96/EC that each authorisation granted 
under this Article must be strictly limited in time. In order to provide the businesses 
and  consumers  concerned  with  a  sufficient  degree  of  certainty,  the  authorisation  is 
granted for a period of six years. However, in order not to undermine future general 
developments of the existing legal framework, it is appropriate to provide that, should 
the  Council,  acting  on  the  basis  of  Article  113  of  the  Treaty,  introduce  a  modified 
general system for the taxation of energy products to which the present authorisation 
would not be adapted, this Decision shall expire on the day on which the rules on this 
modified system become applicable. 

HAS ADOPTED THIS DECISION:  

Article 1 

The  United  Kingdom  is  hereby  authorised  to  apply  reduced  rates  of  taxation  to 
1. 
unleaded  petrol  and  gas  oil  in  all  the  islands  of  the  Inner  and  Outer  Hebrides,  the  Northern 
Isles, the islands in the Clyde and the Isles of Scilly. 

The  reduction  from  the  standard  national  rate  of  taxation  for  unleaded  petrol  or  gas  oil 
respectively  shall  be  no  greater  than  the  additional  cost  of  retail  sales  in  these  geographical 
areas, compared with the average cost incurred of retail sales in the United Kingdom and shall 
be no more than GBP 50 per 1 000 litres of product. 

The reduced rates must comply with the requirements of Directive 2003/96/EC, and in 

2. 
particular with the minimum rates laid down in Article 7 thereof. 

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Article 2 

This  Decision  shall  be  applicable  from  1 November  2011  and  shall  expire  on  31 October 
2017. 

However,  should  the  Council,  acting  on  the  basis  of  Article  113  of  the  Treaty,  introduce  a 
modified general system for the taxation of energy products to which the present authorisation 
would  not  be  adapted,  this  Decision  shall  expire  on  the  day  on  which  the  rules  on  this 
modified system become applicable. 

Article 3 

This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland. 

Done at Brussels, 

For the Council 
The President 

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