The "diff"-er built into fossil assumes files to be diffed are UTF-8 text.

I do not think it is desirable to have fossil trying to guess at file
encodings and process files differently based on its best guess of the
encoding.  What if it guesses wrong?  Better to always assume UTF-8 text.

For the command-line interface, you can specify an alternative "diff" program
to use in place of the built-in differ using the "fossil setting" command.
You can specify both a shell-diff and a graphical-diff.  So if you want the
ability to diff files with different encodings, all you have to do is specify
and external program that has that capability.

I suppose it might be possible to enhance the web interface to use an external
program that can diff files with different encodings.  But I really do not want
to go there at this time.  Better to require files to be UTF-8.