THE Government looks set to back away from its controversial 3% tax penalty on all diesels under the CO2-based tax regime following a hard-hitting industry campaign.

The blanket charge - announced in the Budget - could be scrapped in favour of banded charges of 2% and 1% for 'cleaner' diesels to provide a half-way house for manufacturers and fleets incensed about the penalty.

Pressure is mounting on the Government for a change of stance after Fleet News launched a campaign in conjunction with the Association of Car Fleet Operators and Britain's top fleet diesel manufacturers to have the supplement abolished.

But Steve McManus, assistant director of the personal tax division of the Inland Revenue, said it was unlikely the supplement would be completely lifted for any models either in production or to be launched.

Even Peugeot's ground-breaking 607, which includes a particulate filter and a catalyst to cut oxides of nitrogen, will not be spared the charge, he said.

McManus added: 'There may be lower bands between the 3% charge and its removal to reward diesels that are cleaner overall than older diesels. Although there have been developments, none of them has shown diesel to be as clean as the cleanest petrol cars. That is what we are looking for to remove the supplement.'

However, the concession left Peugeot angry that millions of pounds of investment might not be recognised in the UK by equal treatment compared to petrol. And it fired off a further warning shot by questioning whether it is worth fitting the expensive emissions treatment equipment to cars if there is no benefit for customers through a reduced BIK bill.

John Taylor, fleet and leasing director for Peugeot, said: 'This worries us a great deal, because we have been lobbying hard. 'If this is a definitive statement, then clearly the question has to be asked what are we supposed to do to achieve the removal of this supplement? If the current situation stays, then the UK could be the only European country where this catalyst system is not used. The Government needs to show whether it is truly interested in the environment, or just raising taxes.'