Proposal for a COUNCIL IMPLEMENTING 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: 2017-05-15
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Scotland, South West (England), United Kingdom, derogation from EU law, diesel fuel, fuel tax, lead-free petrol, tax relief

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   EUROPEAN COMMISSION  Brussels, 15.5.2017  COM(2017) 170 final 2017/0079 (NLE)   Proposal for a COUNCIL IMPLEMENTING 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. 

• 

Reasons for and objectives of the proposal 

The objective of this proposal is to allow the United Kingdom of Great Britain and Northern 
Ireland  (UK)  to  continue  applying  a  reduced  rate  of  excise  duty  on  motor  fuels  (namely 
unleaded petrol and gas oil) 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 0,12) 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. 

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. 

Council Implementing Decision 2011/776/EU authorised the United Kingdom to apply, until 
30 October 2017, reduced levels of taxation to unleaded petrol and gas oil used as motor fuels 
in certain islands. By letter dated 16 September 2016 and additional information sent on 16 
December 2016, under Article 19 of the Directive, the UK authorities asked the Commission 
to prolong the application of the 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 0,58 or 
app. EUR 0,67)2. This would mean that the reduced rate would still be far above the current 
EU minimum per 1 000 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 0,12)  per litre  higher  than  the  average  for  the  rest  of  the  UK.  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  higher  price  is  caused  by  the  additional  costs  of  selling  fuel  in  these  regions.  The  UK 
authorities indicate two key reasons for these higher costs:  

(1) 

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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 

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. 
The UK applies the same excise duty rate to petrol and gas oil used as motor fuel. EUR 674 per 1000 l, 
(information from July 2016) 

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(2) 

of fuel. In contrast, almost 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. 

The low population served (103 801 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 70 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  by  motor  vehicles  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 motor fuels is charged 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  all  purchases,  both 
private  and  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 2016, 86 % were 
privately owned and 14 % 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 
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. 

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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. 

• 

Consistency with existing policy provisions in the policy area 

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 other Union policies 

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 
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 price 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. 

The measure is compatible with the health, environment, energy and transport policies of the 
Union.  

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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. 

After the reduction envisaged by the UK authorities, the level of taxation on unleaded petrol 
and gas oil in the regions concerned will still respect the minimum level of taxation pursuant 
to Article 7 of Directive 2003/96/EC. Provided that the measure respects the conditions laid 
down in Article 44 of the General Block Exemption Regulation  (EC) No 651/2014/EU3, as 
well  as  the  general  condition  laid  down  there-in,  the  measure  falls  within  the  scope  of  that 
Regulation and is, by consequence, exempt from the prior notification requirement. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 19 of Council Directive 2003/96/EC. 

• 

Subsidiarity (for non-exclusive competence)  

The field of indirect taxation covered by Article 113 of the Treaty on the Functioning of the 
European Union is not in itself within the exclusive competence of the EU within the meaning 
of Article 3 of the Treaty. 

However,  pursuant  to  Article  19  of  Directive  2003/96/EC,  the  Council  has  been  granted  an 
exclusive competence, as a matter of secondary law, to authorise a Member State to introduce 
further exemptions or reductions within the meaning of that provision. Member States cannot 
therefore substitute themselves for the Council. As a result, the principle of subsidiarity is not 
applicable to the present implementing decision. The proposal therefore respects the principle 
of subsidiarity. 

• 

Proportionality 

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

• 

Choice of the instrument 

Instrument proposed: Council Implementing Decision. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Ex-post evaluations/fitness checks of existing legislation 

The measure does not require the evaluation of existing legislation. 

• 

Stakeholder consultations 

This proposal does not require any stakeholder consultations; it is based on a request made by 
the United Kingdom and concerns only this Member State. 

• 

Collection and use of expertise 

There was no need for external expertise. 

3 

Commission  Regulation  651/2014/EU declaring  certain  categories  of  aid compatible  with  the  internal 
market in application of Articles 107 and 108 of the Treaty (OJ L 187, 26.6.2014, pp. 1–78). 

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• 

Impact assessment 

This proposal concerns an authorisation for an individual Member State upon its own request 
and does not require an impact assessment. 

• 

Regulatory fitness and simplification 

The measure does not provide for a simplification. It is the result of the request made by the 
United Kingdom and concerns only this Member State. 

• 

Fundamental rights 

The measure has no bearing on fundamental rights. 

4. 

BUDGETARY IMPLICATIONS 

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

5. 

• 

OTHER ELEMENTS 

Detailed explanation of the specific provisions of the proposal 

Article 1 - The United Kingdom will be allowed to continue applying a reduced rate of excise 
duty  on  motor  fuels  (namely  petrol  and  gas  oil)  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). 

The level of taxation after reductions can never be lower than the EU minima set in Directive 
2003/96/EC and the reduction would apply for everyone in these region. 

The measure would help the disadvantaged regions to mitigate the higher costs of fuel due to 
insular geographical location of the islands.  

Article  2  -  The  authorisation  requested  is  granted  with  effect  from  1  November  2017  for  a 
period of six years, as requested by the United Kingdom. 

Since  the  United  Kingdom  notified  on  29  March  2017  its  intention  to  leave  the  Union, 
pursuant to Article 50 of the Treaty on European Union, the Treaties will cease to apply to the 
United Kingdom from the date of entry into force of the withdrawal agreement or, failing that, 
two  years  after  the  notification,  unless  the  European  Council,  in  agreement  with  the  United 
Kingdom,  decides  to  extend  that  period.  As  a  consequence,  and  without  prejudice  to  any 
provisions  of  the  withdrawal  agreement,  this  Council  decision  only  applies  until  the  United 
Kingdom ceases to be a Member State. 

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2017/0079 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING 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 electricity4, and in particular 
Article 19 thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

By letter of 16 September 2016 the United Kingdom 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).  The  United  Kingdom  provided  additional 
information on 16 December 2016. 

In  these  areas,  the  prices  of  gas  oil  and  unleaded  petrol  are  higher  than  the  average 
prices in the rest of the territory of the United Kingdom, 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 will not exceed what is necessary to compensate for the additional 
per unit costs borne by the consumers in the geographical areas concerned. 

The reduced excise duty rates 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 rates, the measure will not give rise to additional driving specifically 
linked to the supply of motor fuel. 

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. 

(7) 

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 

4 

OJ L 283, 31.10.2003, p. 51. 

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(8) 

and  consumers  concerned  with  a  sufficient  degree  of  certainty,  the  authorisation  is 
granted for a period of six years. This decision is without prejudice to the application 
of the Union rules regarding State aid. 

Since the United Kingdom notified on 29 March 2017 its intention to leave the Union, 
pursuant  to  Article  50  of  the  Treaty  on  European  Union,  the  Treaties  will  cease  to 
apply  to  the  United  Kingdom  from  the  date  of  entry  into  force  of  the  withdrawal 
agreement  or,  failing  that,  two  years  after  the  notification,  unless  the  European 
Council, in agreement with the United Kingdom, decides to extend that period. As a 
consequence,  and  without  prejudice  to  any  provisions  of  the  withdrawal  agreement, 
this  Council  decision  only  applies  until  the  United  Kingdom  ceases  to  be  a  Member 
State, 

HAS ADOPTED THIS DECISION:  

Article 1 

The  United  Kingdom  is  hereby  authorised  to  apply  reduced  levels  of  taxation  to  unleaded 
petrol and gas  oil used as  motor fuel  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 national  level 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. 

This  Decision  shall  be  applicable  from  1 November  2017  and  shall  expire  on  31 October 
2023. 

Article 2 

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

Done at Brussels, 

Article 3 

For the Council 
The President 

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