The Deposit Return Scheme (DRS) is an environmentally ambitious scheme for single-use drink containers. It will now not be introduced until October 2027. How will it operate for VAT purposes?
This is a freeview 'At a glance' guide to the Deposit Return Scheme (DRS).
Background
In April 2024, following a series of delays in introducing the scheme, a joint policy statement was issued by the UK Government, Welsh Government, Scottish Government and the Department of Agriculture, Environment and Rural Affairs (DAERA) in Northern Ireland. A revised timeline has been agreed on launching the DRS UK-wide in October 2027.
Updates were issued in November 2024:
- In a written statement, the Welsh Government advised that it had not been possible in the time available to address the issues on the operation of devolution caused by the United Kingdom Internal Market Act 2020. As such, the Welsh Government would not be able to proceed with the joint process.
- The Welsh Government stated that it remained committed to bringing forward a DRS.
- Rest of UK: in a policy paper, the UK Government confirmed its commitment to the October 2027 DRS timeframe. It indicated its intention to lay regulations for England and Northern Ireland in November 2024 and appoint the Deposit Management Organisations in April 2025.
The scheme
- The scheme will involve paying a deposit when buying a drink that comes in a single-use container made of PET plastic, steel or aluminium. The deposit will be repaid when the empty container is returned to a return point.
- The position on glass containers will be set out in separate statements issued by each administration.
- Containers between 150ml and three litres will be within the scope of the scheme.
- There will be a single registration and reporting process across the UK for producers.
- Producers of product lines with less than 5,000 units placed on the market across the UK per annum will be able to register it as a 'Low-Volume Product'. These low-volume products will be exempt from specific DRS obligations.
- The level of the deposit is yet to be determined, but it is intended that there will be an aligned deposit level across the UK.
- This could be a flat or variable rate (such as based on the size or material of the container) and will be determined based on relevant evidence and research.
VAT treatment
HMRC published guidance on how VAT will impact the scheme before the legislation was introduced as part of the Spring Budget 2023.
Finance (No. 2) Act 2023 subsequently introduced sections 55B, 55C and 55D to VATA 1994, to deal with Deposit Schemes and ensure that no VAT is charged at any point in the supply chain in relation to the deposit element of the price for a deposit scheme product.
The rules for how and when the VAT liability of suppliers who make the first sale of standard-rated deposit scheme products that include an unredeemed deposit amount is to be calculated and accounted for will be set out in subsequent regulations.
The rules are intended to operate as follows:
- No VAT will be charged on the deposit at the point of sale.
- VAT will only be due on deposits not repaid because the container was not returned.
- The charging of VAT will only apply to the first person in the supply chain, or the 'producer' and then only if the supply of the drink by that business was standard rated.
- No other business in the supply chain will need to account for VAT in relation to the deposit.
- The value of unredeemed deposits will be calculated as 'total DRS sales less total DRS returns'.
- To amass this information, it is expected that details on returned containers will need to be collected at the return points. It is anticipated that producers will need to contract with scheme administrators to manage this process.
Useful guides on this topic
Time of supply (Tax Point)
The time of supply of goods or services determines the date on which VAT becomes due. There are a number of different rules which must be considered.
Place of supply: Goods
The place of supply (POS) of goods determines whether the supply is within the scope of UK VAT and whether VAT is payable on that supply.
External links
HMRC Factsheet: How VAT will be applied to the Deposit Return Scheme
Finance (No. 2) Act 2023 section 315, Deposit schemes
April 2024: Deposit Return Scheme for drinks containers: joint policy statement
November 2024: Written Statement: The Development of a Deposit Return Scheme for Wales
November 2024: Policy paper: UK government update: Deposit Return Scheme for drinks containers
