Scottish Deposit Return Scheme delayed to March 2024
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
18 April 2023
Justine Riccomini explains the current state of play in the Scottish Deposit Return Scheme and how the VAT scheme might work for importers and producers.
Scotland’s ambitious net zero plans are being supplemented by the introduction of the Scottish Deposit Return Scheme (DRS), which was due to launch on 16 August 2023 but has been delayed by ten months following an announcement by First Minister Humza Yousaf on 18 April 2023. The scheme aims to recycle billions of bottles and cans every year and is headed up by the Circular Economy Minister, Lorna Slater MSP. The Minister aims to achieve a 90% collection rate by 2024, and the Scottish Government is working with retailers to enable people to begin returning bottles to them.
Net Zero Scotland and Circularity Scotland
Iain Gulland, Chief Executive, Zero Waste Scotland said of the scheme:
“Zero Waste Scotland is proud to have advised on the design of Scotland’s Deposit Return Scheme, a gamechanger with multiple benefits including reduced carbon emissions, more and better recycling, and the removal of up to one third of the litter from our streets.
“Despite the uncertainty wrought by the pandemic I’m delighted we now have a go-live date for this important scheme, which Zero Waste Scotland will continue to support.
The first person in a supply chain (referred to as the ‘Producer’) will be charged a fee per container produced to help fund the operation of the scheme. Circularity Scotland will utilise the funding received from the producers to pay a handling fee to return point operators and fund the logistics operations required to collect containers for recycling, as well as the operating costs of the scheme administrator.
Further information is available on the Circularity Scotland website.
ICAS notes that at April 2023 there is no information relating to VAT on the Circularity Scotland website.
The DRS and VAT
The scheme technically comes within the scope of VAT, but a special scheme is currently being devised by the UK Government which will also impact the Scottish scheme, because VAT is still a ‘retained’ UK tax, i.e. not a devolved matter. The original intention was to ‘assign’ VAT to Scotland following the Smith Commission of 2014, because the UK was still within the EU at that time. However, this did not happen due to the complexities surrounding the methodology by which the assignment would take place.
As things stand, there is still relatively limited information about how exactly the scheme itself might opeate in terms of VAT. The reporting aspect seems clear enough, but the accounting aspect was unclear until today when HMRC confirmed that VAT will be due on the VAT inclusive amount using the VAT fraction – i.e. 3.33p of every 20p deposit in Scotland (it may be that when the DRS is rolled out elsewhere in the UK that the deposit value is different). The 2023 Spring Finance Bill introduced legislation on how VAT will be accounted for when deposits are charged under statutory deposit schemes. A consultation on the VAT aspects is running in the UK from 29 March to 17 May 2023, which ICAS will respond to. The current approach being proposed will require an amendment to the VAT Regulations 1995 (SI 1995/2518).
The proposals provide for the exclusion of the deposit amount (20p) from the taxable amount when qualifying sales are made and require that VAT is only accounted for on the deposits of drink containers that are not returned. The containers are valued differently so as no input tax restrictions apply – they are a taxable supply, but the consideration is less. They also establish who must account for that VAT and provide for regulations to be made to establish when and how they must do so.
Nothing is (yet) set in stone
HM Treasury has produced a factsheet which states that:
“HMRC expects the rules to operate as follows:
- At the point of sale, no business will account for VAT on the deposit amount.
- VAT will be due only on unredeemed deposits that are associated with unreturned containers.
- Only the first person in a supply chain (referred to as producers) charging a DRS deposit will have to account for VAT on unredeemed deposits, and only if their supply of the drink was standard rated.
- No other businesses further along the supply chain, such as wholesalers and retailers, will account for VAT on deposits at any point.
- Producers will calculate the VAT due on unreturned deposits based on their total DRS sales less DRS returns, in accordance with VAT regulations expected to become law in the early summer.
- To facilitate this, information on returned products will need to be collected at return points and passed to producers. A producer may contract with a scheme administrator to collect containers and manage deposits who will then provide them with this information.
- Producers will then use this information to account for the VAT due on unredeemed DRS deposits on their VAT return.
- If containers are returned in a subsequent VAT period they will be included in the next calculation, so over time the correct amount of VAT will be accounted for to HMRC.”
Timeline so far
ICAS understand that by March 2022, Circularity Scotland was due to have signed contracts with partners to deliver its logistics, operations and IT systems. Following that, in August 2022, a public awareness campaign was launched and the building of counting and sorting centres commenced.
Retailers were expected to begin a roll-out of the deposit return infrastructure (reverse vending machines and over the counter collections) from Summer 2022 and were asked to start using that infrastructure on a voluntary basis from November 2022. Orkney announced that they would commit to commence their community-run return scheme from November 2022.
Circularity Scotland and SEPA have begun the process to register producers from January 2023, and in July 2023 it is expected that end-to-end testing of containers through the system will take place, just prior to the nationwide launch in August 2023. However, as the launch is delayed for ten months, these timescales may also be delayed.
Questions to consider
1.Has Scotland consulted sufficiently with the drinks and hospitality sector business community to ensure that the businesses involved are not placed at a disadvantage?
2.Is March 2024 the right time to be bringing this scheme in? There is an obvious need to move towards net zero, but if there is confusion and business is placed at a disadvantage compared to UK counterparts who are not going to be involved until 2025, will it work and will Scottish people and businesses comply?
3.The scheme relies heavily on cooperation from the public and up the chain to retail and wholesale to ensure the distributions meet the returns as far as possible, so that the importers/producers have less VAT to pay in the final analysis. If they don’t the producers and importers will be penalised by being charged VAT on unreturned deposits. Is 20p enough?
4.Will Scotland be working with the rest of the UK to return containers – for example, if you purchase a bottle of diet coke in Bannockburn can you return it in Bath and get your 20p back?
5.There are a number of Scottish businesses who have been granted exemptions as deposit return scheme points – these are listed on the SG website but the reason for this is unclear.
6.There is a question around the definition of a beverage/drink for this particular purpose due to the nature of some liquid ‘meals’ for dieting purposes and drinkable ‘meals’ for e.g. terminally ill patients who are unable to consume solid food. If these are deemed to be food as opposed to drink, they will not be included in the DRS. In addition meal deals and “buy one, get one free” arrangements may need to be reconfigured where the drink element attracts a DRS charge.
ICAS is meeting policy officials from HMRC over the next few weeks to assess the state of play.
If any ICAS member wishes to comment or make the ICAS Tax team aware of an issue relating to UK and devolved taxation, please contact a member of the Tax team.