UK Deposit Return Scheme VAT 2027: How Deposits Are Taxed

The UK is expected to introduce national drink Deposit Return Schemes (DRS) in autumn 2027. Under the proposed VAT change in Finance Bill 2026–27, producers and importers will no longer account for VAT on the deposit at each relevant supply. Instead, the scheme administrator will account for VAT on deposits that are not refunded to consumers.

This is a business VAT-accounting change, not a new VAT rate on every drink. The exact scheme operation and detailed accounting regulations remain part of the implementation process. Businesses should separate the refundable deposit from the product price and follow the final HMRC rules when the scheme starts. For the separate question of whether a business must register for VAT, see the UK VAT Registration guide.

What is a Deposit Return Scheme?

A DRS adds a refundable deposit to certain drinks containers. A consumer pays the deposit with the drink and receives it back when the empty container is returned through the approved system. The scheme administrator manages the return process and the treatment of deposits that are not refunded.

The UK policy materials describe three national schemes: one for England and Northern Ireland, one for Scotland and one for Wales. The final list of in-scope drinks and containers, return points and operational responsibilities must be checked against the scheme rules rather than assumed from the word “bottle” or “can”.

How the proposed VAT treatment works

Under the proposed change, producers and importers will not be required to account for VAT on the DRS deposit at the relevant supply stages. Instead, VAT on deposits that are not returned will be accounted for centrally by the scheme administrator.

The aim is to simplify the supply-chain treatment. A producer or importer should not assume that it must calculate output VAT on unreturned deposits after the new framework starts; the administrator's statutory role is central to the proposal.

The policy distinction matters. HMRC's July 2026 policy paper says the current law already disregards the deposit when determining the value of the supply at the point of sale, but manufacturers or importers making the first UK supplies currently account for VAT on deposits that are not refunded because containers are not returned. The proposed Finance Bill 2026–27 change would move that unrefunded-deposit liability to the scheme administrator. This is a change in who accounts for the VAT, not an announcement that the deposit becomes a new VAT-rated product at every supply stage.

The change is not fully operative yet. HMRC says the primary legislation is to be introduced in Finance Bill 2026–27, with detailed accounting rules in a Statutory Instrument after Royal Assent. The provisions are intended to take effect when the deposit schemes commence, expected in autumn 2027. Until that commencement and the final regulations, a business should not backdate the administrator treatment to current invoices, stock movements or returns. Keep the system capable of applying a date-based transition rule.

Why the current and future rules differ

The existing VAT framework contains rules for deposit schemes, but the government proposes a different allocation of the VAT accounting responsibility. The policy paper says manufacturers and importers currently have obligations for VAT on deposits that are not refunded, while the new framework will place that liability with the scheme administrator.

Do not apply the 2027 administrator rule to a current transaction before the relevant commencement. Until the new scheme and rules take effect, businesses should follow the current VAT legislation and their existing documentation. Transition timing matters for stock held before launch and for supplies crossing the commencement date.

Which businesses are affected?

The direct audience includes businesses that manufacture, import or supply drinks products within a statutory DRS and the bodies operating the schemes. Retailers, wholesalers, producers, logistics providers and software suppliers may all need to change data flows even where the final VAT liability sits with the administrator.

An ordinary drink seller may therefore have operational work even if it is not the entity paying VAT on unreturned deposits.

HMRC estimates that around 40,000 to 50,000 businesses may need to familiarise themselves with the correct VAT position and code the deposit correctly in their records. That estimate is a policy-paper impact estimate, not a complete register of businesses in scope. A business should identify its role from the final scheme rules and contract, rather than infer scope from turnover or from whether it sells to consumers. The statutory administrator's responsibility also needs to be distinguished from a retailer's role in collecting, refunding or reconciling deposits.

Records and systems to prepare

Build a product-level DRS data trail before launch. At minimum, prepare to record:

1. the product and container type;
2. the deposit amount and whether it is refundable;
3. the supplier, importer or producer role;
4. the date and stage of each supply;
5. deposits received, refunded and not returned;
6. adjustments, refunds and damaged or excluded containers; and
7. the VAT treatment used under the final accounting regulations.

The exact fields will depend on the scheme administrator and HMRC regulations. Do not hard-code a VAT rule into an ERP or till system before the final technical specification is published.

DRS VAT is not the same as VAT registration

The DRS change answers a narrow accounting question: who accounts for VAT on deposits that are not refunded under a statutory scheme. It does not decide whether a business is VAT-registered, whether a drink is zero-rated or standard-rated, whether an import is subject to import VAT, or how a sale outside the scheme is taxed.

The proposed DRS rule also does not answer whether the drink itself is zero-rated, standard-rated or subject to another VAT treatment. The invoice and till design should therefore preserve separate fields for the product supply, the refundable deposit, refunds and any ordinary VAT adjustment. If a business imports drinks, its import VAT and customs records remain separate from the DRS deposit ledger. If it supplies outside the statutory scheme, it must not assume that the DRS treatment follows the product into that transaction.

For a group with several companies, document which legal entity makes the first UK supply, which entity contracts with the administrator and which entity receives or pays settlement amounts. Reconciliation should explain differences between units sold, deposits charged, containers returned, deposits retained and administrator statements. This is especially important where a third-party logistics provider or marketplace handles the physical return but another entity makes the VAT supply.

Practical preparation checklist

1. Identify products and containers likely to be within the final scheme scope.
2. Separate product price, refundable deposit and VAT fields in data systems.
3. Confirm whether the business is producer, importer, retailer, wholesaler or administrator.
4. Map return, refund, damaged-container and unreturned-deposit events.
5. Monitor Finance Bill 2026–27, Royal Assent and HMRC accounting regulations.
6. Test the transition from current VAT treatment to the scheme-start rules.

Add a governance review to that checklist. Assign an owner for monitoring Finance Bill amendments, Royal Assent, the HMRC Statutory Instrument and each national scheme's technical specifications. Keep a dated version of the policy decision used by the ERP or till team. Before go-live, reconcile a sample from the consumer receipt through the wholesaler, producer or importer records and the administrator settlement. Test refunds, failed returns, damaged containers, cancelled invoices, credit notes and goods held across the commencement date. A control that only checks total cash will not prove that the product and deposit were classified correctly.

Keep pre-commencement and post-commencement evidence in separate reporting periods. When an invoice or credit note corrects an earlier supply, the VAT treatment should follow the applicable rule for that original transaction and the final HMRC instructions. Retain the administrator statement, return-point data and adjustment approval with the VAT working papers. This makes it possible to explain why an unreturned deposit was included or excluded and prevents an estimate of container returns from silently becoming the VAT return figure.

Keep a dated implementation register showing the rule version, scheme administrator, affected products, system release and person approving the VAT mapping. Re-test the mapping after every HMRC or scheme update, and do not treat a supplier’s product code as proof that the statutory DRS classification is correct.

Frequently Asked Questions

The practical priority is clean separation of product, deposit and return data. The accounting result should be updated when the Finance Bill and HMRC regulations settle the final implementation.

Official sources

• HMRC: VAT provisions for drink Deposit Return Schemes
• HMRC: VAT provisions for Deposit Return Schemes — policy paper collection
• HMRC: Draft legislation for VAT provisions for Deposit Return Schemes
• GOV.UK: Register for VAT