The way it works is this.
All canalside diesel is red, and it all goes into one tank. At purchase you make a written declaration of what proportion you intend to use for propulsion, and what proportion for domestic (heating water, charging batteries). HMRC expect boaters to declare 60/40, most boaters declare 0/100. Full duty is then charged on the propulsion element.
If this system stops and all diesel is charged at the full rate, I imagine canalside road garages will see a significant increase in red diesel sold into 20l drums.