Deposit return scheme VAT: fix the cash ledger now

By Adrian Sidaway, Director (RI) Head of Corporate Audit & Accounts

From 1 October 2027, a refundable 20p deposit will be charged on every eligible PET plastic, aluminium and steel drinks container sold in England, Scotland and Northern Ireland. Draft legislation published on 13 July 2026 moves VAT on unredeemed deposits from producers to the scheme administrator, but the harder problem stays with producers: separating product revenue, deposit cash and scheme liabilities accurately at SKU and customer level.

What has been settled, and what has not

It is easy to read the deposit return scheme as a project still waiting for its detail. That was a fair reading eighteen months ago. It is not a fair reading now.

The VAT treatment changed at Autumn Budget 2025, when the government said it would remove the requirement for individual producers to account for VAT on unreturned deposits and move that obligation to the deposit management organisation. Draft legislation followed on 13 July 2026, for introduction in Finance Bill 2026-27. Producers and importers will not account for VAT when deposits are charged through the supply chain. The scheme administrator will account for VAT only on deposits that consumers do not reclaim.

Exchange for Change, the industry-led organisation appointed to run the scheme across England, Scotland and Northern Ireland, confirmed a flat 20p deposit in April 2026, applying to every in-scope container regardless of size. The return handling fee payable to return point operators followed in June, on a tiered basis across manual and automatic return points. Exchange for Change has indicated that producer registration is expected to open in late 2026.

So the deposit rate is known, the fee structure is known, the launch date is fixed and the policy direction of the VAT treatment is settled. What remains open is the final wording of the tax legislation and the operational detail Exchange for Change is still publishing. Neither is a reason to leave the finance architecture until the end, because the design work can now be done against numbers that already exist.

The scheme creates a second value stream on every unit

The regulations cover single-use drinks containers made wholly or mainly from PET plastic, aluminium or steel, with a capacity from 150 millilitres to three litres. Wales is implementing its own scheme under separate regulations, with glass in scope, so a producer selling across the UK is working to more than one rulebook. From launch, everyone in the supply chain must charge the deposit when supplying an in-scope filled container, and suppliers must also check that the producer is registered and that the item carries the required scheme labelling.

Each eligible unit therefore carries two values. The first is the selling price of the drink. The second is the 20p deposit. They may be collected on the same invoice, settled in the same bank receipt and disputed in the same customer remittance, but they do not have the same accounting character.

There is a related change that is easy to miss. PET, aluminium and steel drinks containers covered by the deposit return scheme sit outside packaging extended producer responsibility. PET, aluminium and steel drinks containers move out of one cost regime and into another, while glass drinks containers outside Wales remain within pEPR. For a producer with a mixed portfolio, that is a real change to the shape of packaging cost, and it should be modelled rather than assumed to net off.

The useful test is not whether the ERP can print a separate deposit line. It is whether the business can reconcile, for a given period, the number of in-scope units supplied, deposits charged to customers, deposits payable into the scheme, exceptions and corrections, and the cash movement between them. If those quantities and values cannot be bridged, the year-end balance will not be the first problem. Daily customer and scheme reconciliations will be.

That makes SKU master data central. Container material, size, market, producer status, scheme label and pEPR status need controlled fields, not notes held by one person in packaging or quality. Brand ownership does not always map neatly onto scheme responsibility either. The regulations define the producer by reference to who first supplies the drink in the relevant market, so own-label manufacturing and contract packing need a product-by-product responsibility map, with the commercial contract following that map rather than a general assumption that the brand owner or the filler will deal with it.

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"The deposit is not a price rise, even though it arrives in cash with the sale. If the ledger treats it like turnover, management information will overstate revenue and obscure the cash that belongs elsewhere in the scheme."

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Where margin reporting can go wrong

Management accounts are especially vulnerable during implementation. If deposits are posted to sales, reported revenue rises without any increase in underlying trading activity. Gross margin percentage may then move for a purely presentational reason, depending on where the corresponding liability or payment is posted. Customer-level profitability can also be distorted if retailer deductions relating to deposits are netted against product revenue.

The same problem appears in forecasts. A volume model that multiplies units by an invoice value including the deposit will overstate commercial revenue and cash generation. A working capital model that excludes deposits entirely may understate the scale and timing of cash passing through the business. Neither view is satisfactory. The forecast needs separate drivers for drink revenue, deposit receipts, scheme settlement and timing differences.

This matters to lenders and investors as well as to management. Banking covenants and earn-out definitions usually begin with revenue, EBITDA or working capital drawn from the accounting records, and the legal drafting will not have anticipated a statutory deposit stream. Businesses approaching a refinancing, acquisition or sale before October 2027 should identify now whether deposits could affect covenant calculations, completion accounts or revenue-based metrics, and agree the treatment before the numbers become contentious.

Does a simpler VAT rule mean less work?

Not for the ledger. Moving the obligation for unredeemed deposits to the scheme administrator removes a genuine burden. Under the earlier approach, the manufacturer or importer would have made a periodic adjustment for containers not returned, calculated from data it did not hold and consumer behaviour it could not influence. Losing that is a straightforward improvement.

It does not mean deposits can be ignored in VAT configuration. Invoice templates, tax codes and digital records must keep the deposit outside the taxable consideration for the drink. Credit notes, cancellations, damaged stock, free samples, multipacks and cross-border movements all need scenario testing. Because the legislation is still in draft, the build should be configurable, with a documented decision point for when the final Finance Act wording and HMRC guidance are available.

A clean control design is also much stronger than a year-end spreadsheet. Drinks producers often have several routes to market, including retail multiples, wholesalers, foodservice, direct-to-consumer and export. If each channel handles the deposit differently, the reconciliation becomes a manual exercise built on inconsistent evidence. One controlled deposit code, supported by channel-specific rules and a quantity-to-cash reconciliation, is a better starting point.

What should be built before registration opens?

Expected producer registration in late 2026 is the next important milestone, and it will require the business to state which entity is the producer for each product and each market. That is a decision with direct cash and liability consequences, and it is far easier to make once the underlying data exists.

Build an in-scope SKU register and assign ownership for every data field. Decide which legal entity is the producer for each product and market. Create separate nominal accounts for deposits receivable, deposits payable and scheme fees. Design an invoice line that is visible to the customer but excluded from product revenue, discounts and VAT. On that last point, commercial terms should state clearly that the refundable deposit sits outside discounts, rebates, commissions and turnover-based charges, rather than leaving the answer to the way a customer system happens to calculate a percentage deduction.

Then reconcile units from production and sales records through to deposit values, and test that reconciliation through returns, credits, write-offs and customer deductions. Model the peak timing difference under realistic volumes as well. Even if deposits are economically neutral over time, they create large gross cash movements at 20p a unit. The relevant risk is not the annual net position. It is whether settlement dates, retailer payment terms and customer disputes leave the producer temporarily funding the chain. A scenario showing the highest deposit receivable and payable balances is more useful than an annual average.

The October 2027 deadline is closer than it looks

A 1 October 2027 launch means the systems change must be ready well before the first compliant product reaches a customer. Artwork lead times, packaging run-down, customer onboarding, ERP release calendars and regression testing all push the practical deadline forward. Drinks with long shelf lives may be produced months before launch, so production and supply dates cannot be treated as the same thing.

The businesses that handle this well will not frame the deposit return scheme as 20p added at the checkout. They will treat it as a new controlled sub-ledger linked to physical units, customer invoices and scheme reporting. That is the difference between cash passing cleanly through the business and a reconciliation problem that grows with every can and bottle sold.

If the deposit return scheme is likely to affect a product portfolio, the useful discussion now is how unit data, contracts and the ledger will join up. The food and beverage team can review the financial reporting and control design before it becomes a reconciliation exercise after launch.

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This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.

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Sources

Scope, launch date, supply chain charging, registration, labelling and record keeping: The Deposit Scheme for Drinks Containers (England and Northern Ireland) Regulations 2025, SI 2025/67.

Producer, supplier and retailer responsibilities from 1 October 2027: Department for Environment, Food and Rural Affairs, Deposit Return Scheme drinks producer and retailer responsibilities, GOV.UK.

Decision to move VAT on unredeemed deposits to the scheme administrator: HM Treasury, Autumn Budget 2025.

Draft legislation for Finance Bill 2026-27: HM Revenue and Customs, VAT provisions for Deposit Return Schemes, published 13 July 2026.

Flat 20p deposit confirmed April 2026, return handling fee confirmed June 2026, producer registration opening late 2026: Exchange for Change.

Exclusion of deposit return scheme containers from packaging extended producer responsibility: Department for Environment, Food and Rural Affairs, packaging extended producer responsibility guidance, GOV.UK.

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