UK Proposes Simplified VAT Treatment for Drink Deposit Return Schemes From 2027

The UK plans to simplify VAT accounting for Deposit Return Schemes by making scheme administrators responsible for VAT on unrefunded deposits. The change is expected to apply when the UK’s three national schemes start in Autumn 2027.

The UK government has announced plans to revise the VAT treatment of deposits under Drink Deposit Return Schemes (DRS) ahead of their expected introduction in Autumn 2027.

Under the proposed approach, businesses throughout the drinks supply chain will not account for VAT on the deposit element of the price. Instead, the scheme administrator responsible for operating each national Deposit Return Scheme will account for VAT on deposits that are ultimately not refunded because containers are not returned.

The change is intended to simplify the VAT process for businesses selling drinks covered by the schemes and ensure that the correct amount of VAT is collected.

The new framework is not yet in force. Primary legislation will be introduced through the Finance Bill 2026-27, followed by detailed Tax Authority (HMRC) accounting rules in secondary legislation after the Bill receives Royal Assent. The provisions are expected to apply when the Deposit Return Schemes begin in Autumn 2027.

The UK currently has specific VAT legislation for drinks Deposit Return Schemes in sections 55B to 55D of the Value Added Tax Act 1994, introduced through the Finance (No. 2) Act 2023.

Under the existing framework, the refundable deposit is disregarded when determining the value of the supply of a scheme product. In practical terms, suppliers do not account for VAT on the deposit when the drink is sold.

Instead, where a container is not returned, and its deposit is therefore not refunded, the manufacturer or importer that made the first supply of the product in the UK is responsible for accounting for VAT on that unreturned deposit.

The UK government has now decided to replace this approach before the Deposit Return Schemes become operational.

The main change concerns who accounts for VAT on unrefunded deposits.

Under the proposed framework, responsibility will move from manufacturers and importers to the scheme administrator for each Deposit Return Scheme.

The proposed process can therefore be summarised as follows: when an in-scope drink is sold, a returnable deposit is added to the price, but businesses in the supply chain do not account for VAT on that deposit. If the container is returned, the deposit is refunded. If it is not returned, the relevant scheme administrator accounts for VAT on the unrefunded deposit.

The government plans to introduce three national Deposit Return Schemes: one covering England and Northern Ireland, one for Scotland, and one for Wales.

The schemes are expected to start in Autumn 2027 and will require sellers to add a refundable deposit to the price of bottled and canned drinks that fall within their scope.

Although responsibility for VAT on unrefunded deposits will sit with scheme administrators, retailers and other businesses selling DRS products will still need to understand the correct VAT treatment.

This is particularly relevant for retailers because the product price and the refundable deposit will need to be treated correctly in POS, ERP and accounting systems.

Impact on POS, ERP and accounting processes

From a retail systems perspective, the change creates an important distinction between the sale of the drink and the associated refundable deposit.

Affected systems will need to identify DRS products and correctly record the deposit separately from the VAT treatment of the underlying product. This may affect product master data, POS tax configuration, transaction records and accounting mappings.

Retailers should also ensure that the deposit treatment remains consistent across different sales and return processes. Although the scheme administrator will carry the VAT liability for deposits that are not refunded, businesses in the supply chain will still need accurate records to apply the intended VAT treatment.

What should businesses prepare?

Retailers, manufacturers, importers and other businesses selling drinks expected to fall within the Deposit Return Schemes should identify where deposits will be recorded in their existing POS, ERP and accounting systems.

In particular, businesses should prepare to separate the deposit from the VAT treatment of the underlying product and ensure that the deposit is assigned the appropriate accounting treatment throughout the transaction process.

Manufacturers and importers should also take account of the planned removal of their responsibility for VAT on unrefunded deposits when preparing their future DRS processes.

Affected businesses should therefore monitor both the Finance Bill and subsequent HMRC regulations before finalizing system configurations for the expected Autumn 2027 launch.

In our view, centralising VAT on unrefunded deposits with the scheme administrator should simplify compliance for retailers, manufacturers and importers. For retailers, the main implementation point will be ensuring that POS and ERP systems correctly separate the DRS deposit from the VAT treatment of the underlying drink throughout the sales process.

The main source for this proposal is the Tax Authority’s (HMRC) Policy paper – VAT provisions for drink Deposit Return Schemes. Source. 

Ivana Picajkić, Medior Legal Consultant at Fiscal Solutions

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