UK Government 'profiting' from Scotland's deposit return scheme amid VAT row

The return scheme will lead to people paying a 20p deposit when they buy a drink that comes in a single-use container. They will get their money back when they return the empty container to one of tens of thousands of return points.

In announcing the delay to the scheme in November, Greens Circular Economy Minister Lorna Slater pointed to the UK Government’s intent to charge VAT on the bottles collected as one of a string of reasons for the hold-up.

Now, drinks manufacturers and retailers have joined forces to urge UK ministers to re-think its decision over VAT.

Industry leaders have warned that if VAT is applied to the deposit fee on return schemes across the UK, it will mean businesses will lose an estimated £185m in the first year alone – including £15.5m from the Scottish Government’s policy.

In a letter to UK ministers, organisations including the Food and Drink Federation, British Soft Drinks Association, the Association of Convenience Stores, the British Retail Consortium, the Natural Source Water Association and the British Beer and Pub Association have called for the Tory Government to “ensure deposits to not attract VAT”.

The intervention warns that the relaxation on VAT will allow the deposit return scheme “to be as effective as possible without adverse consequences on producers, retailers and consumers”.

The letter adds: “Charging VAT on deposits diverts money to the UK Government at the expense of the scheme administrator, producers, retailers and consumers.

“It is our view that by profiting from environmental measures and benefitting financially from one that fails to deliver, the Government contradicts the schemes’ stated aims.

“Establishing a DRS system is already a complex programme of work, requiring wholesale changes to business operations and consumer habits. By including VAT within deposits the Government risks an additional, and unnecessary, layer of complexity that could easily lead to further unwanted delays.”

Gavin Partington, director general of the British Soft Drinks Association, said: “While we share the UK Government’s ambition to introduce a deposit return scheme, applying VAT to the deposit collected risks jeopardising the success of a landmark environmental policy. This makes zero sense and needs to change.

“We are calling on the UK Government to reverse its decision to apply VAT to the deposit fee while there’s still time.”

Ms Slater has warned that “the purpose of the deposit return scheme is environmental, not to raise revenues”, adding that “it is hugely disappointing that the UK Government is maintaining that VAT applies”.

She added: “The issue is not just the additional cost that that brings. I understand from industry that there are still many details to be ironed out with the Treasury’s proposal, and that there are specific technical challenges that exist—for example, because VAT is not applied equally through all parts of the system—that will affect the financial flows between thousands of different actors in the scheme.

“We will, of course, continue to work constructively with HM Treasury, Circularity Scotland and wider industry to ensure that a solution is put in place in a way that is workable, effective and efficient for businesses."

“Between now and August 2023, there is a lot of work to be done and a lot of investment to be made. I will keep in close contact with industry on the delivery of the key milestones as different parts of the system roll out their implementation plans.”

The Treasury has stressed that VAT being charged on deposits is in line with some other countries’ deposit return schemes.

A Treasury spokesperson said: “The UK Government supports the environmental aims of deposit return schemes and we continue to engage with the soft drinks industry to explore issues around their design and implementation.”