A new cash incentive system is set to be introduced in 2025 in England, Wales, Scotland, and Northern Ireland, targeting drinks supplied in single-use containers.
The scheme - devised to incentivise people to recycle their drinks bottles and cans to reduce litter and plastic pollution across the UK - will require a small, refundable deposit to be added to the sales price of most drinks sold in single-use containers.
Every year, consumers in the UK go through approximately 14 billion plastic drink bottles and nine billion drink cans, many of which are then condemned to landfill or littered around our environment. The new scheme aims to ensure that 85% fewer drinks cans and bottles are discarded after three years.
All sellers of drinks sold in these containers will be required to add a refundable deposit to the price of their product. Then, once consumed and the container is returned, the deposit will then be refunded to the customer. The Drinks Deposit Return Scheme requires a deposit to be charged at each stage of the supply chain - including the manufacturer, importer, wholesaler, and retailer.
The scheme will include special machines, known as reverse vending machines, as well as designated sites where people are able to return their bottles and cans and receive their money back. In most cases, it is likely to be the retailers initially selling the drinks who would host the return point.
International examples show that a deposit return scheme (‘DRS’) can quickly become a simple part of daily life to make recycling easier and more efficient - with Germany, Finland, and Norway achieving impressive recycling rates of above 90%. The UK currently sits at a 70% recycling rate for drinks containers, showing room for improvement.
Under the current VAT accounting rules, VAT would be chargeable on the full price payable for the drinks, which would include any deposits added to the price. To ensure that the VAT amount paid to HMRC is reflective of the amount the customer pays if the drinks container is returned, the VAT amount would be subsequently adjusted as a result.
In order to simplify the VAT accounting process under the DRS, there will be new measures introduced that result in the same outcome, but via different means. This new measure will remove the requirement to account for VAT on the value of the deposit when the drink is sold, at each stage of the supply chain.
Alternatively, the importer or manufacturer who initially sells the product in the UK will be required to account for VAT on the value of the deposit for containers that have not been returned - done via a periodic VAT accounting adjustment. The obligation therefore lies on the first person who sells the product in the UK to account for unreturned containers.
Subsequent sellers of the drinks - such as cafes, shops, and kiosks - would treat the deposit as being outside the scope of VAT, making calculations a little easier. When the customer returns the container, the refunded deposit will also be treated outside the scope of VAT, meaning no adjustment will need to be made.
Further information on these new rules is due to be set out in secondary legislation, alongside a HMRC VAT notice. These are yet to be published, but we expect to receive further information later in 2023.
Although these changes are not due to be introduced until 2025 at the earliest, the scheme has the potential to have a big impact on affected businesses. Therefore we’d urge business owners to consider any required changes to their operations at an early stage.
Our experienced team is on hand to help - get in touch today for advice and guidance on the new legislation.