Scotland's deposit return scheme - obligations on producers

This is our second blog on the Scottish Government's recently launched comprehensive deposit return scheme ("the DRS"). Please see here for an overview of the mechanics of the DRS and key obligations on producers and retailers, and here for a summary of the core compliance requirements for retailers.

In this blog, we will discuss key obligations on producers under the DRS, and what producers need to do to comply with those obligations.

Producer obligations - introduction

The Deposit and Return Scheme for Scotland Regulations 2020 ("the 2020 Regulations") set out the obligations on producers in respect of the DRS.  In our previous blog we discussed what drinks containers are covered by the DRS (known as "Scheme Articles"). SEPA has issued guidance on what is a Scheme Article.

A producer under the 2020 Regulations is either the "brand owner" (where Scheme Articles are "branded in the UK") or the importer (where Scheme Articles are "branded by a brand owner outside the UK"). "Brand owners" are those who hold themselves out to be the manufacturer or originator of the Scheme Article by putting a name, trademark or other distinguishing mark on a scheme article or packaging, and the place where the Scheme Article is "branded" is determined accordingly.

We set out in our previous blog the general obligations on producers. These obligations can be carried out by producers directly or through a scheme administrator. If a producer appoints a scheme administrator - and there is currently only one scheme administrator in Scotland, Circularity Scotland (CS) – it is the scheme administrator that is responsible for applying for registration of the producer and complying with the producer's obligations as set out in the 2020 Regulations (and discussed in this blog).

SEPA has issued helpful guidance on producer obligations and on frequently asked questions in relation to the DRS.

What products can producers sell / allow to be sold in Scotland?

The scheme applies to Scheme Articles, meaning drinks that are:

• packaged in a single-use container made from PET plastic, glass, steel or aluminium, which is conceived or designed to contain between 50ml and 3 litres of liquid and to be sealed at the point of sale (i.e. airtight and watertight), and which the customer cannot return to its point-of-sale state;
• first made available by the producer to be marketed, offered for sale or sold on or after 16 August 2023; and
• made available to be marketed, offered for sale or sold by the producer for the purposes of its retail sale in Scotland.

The sale of drinks that would meet the first two parts of this definition, but which were not made available to be marketed, offered for sale or sold by the producer "for the purposes of its retail sale in Scotland", will essentially become illegal in Scotland from the scheme 'go live' date of 16 August 2023 – i.e. it will be a criminal offence for any person (producer, retailer, etc.) to market, offer for sale or sell such a product. (Articles that are first made available to be marketed, offered for sale or sold prior to 16 August will fall outside the second part of the definition, so can still be marketed (etc.) after that date.) The offence will be punishable by a fine, with potential individual liability for a director, manager, secretary, partner or similar where the offence was committed with their consent or connivance, or because of their neglect.

This is intended to be an anti-avoidance provision, to keep containers out of the Scottish market if the producer has neither paid the applicable deposit into the system nor paid the producer fees intended to fund the administration of the DRS. Producers will therefore need to specify which units of their product are intended for the Scottish market, to ensure they can be lawfully sold in Scotland. They may also want to make clear to their buyers that other units are not for sale in Scotland, to protect themselves in the event that those units then find their way into the Scottish market.

This is likely to create significant logistical challenges for producers whose supply chains currently operate on a UK-wide basis. Changes to product labelling is not mandatory but in practice will likely become a commercial necessity to facilitate supply chain traceability. The scheme administrator (CS) has produced a discretionary logo, but producers are not obliged to use any specific labelling for containers included in the DRS. Although the 2020 Regulations do not mandate labelling changes for Scheme Articles, CS has advised that creating a new label and barcode will improve the security of the scheme and adding a consumer facing logo will highlight those products falling within scope. Further, if product packaging is not distinct for those items intended for the Scottish market, with producers using a UK-wide barcode rather than a DRS-specific one, they will have to pay a surcharge on top of the producer fee for each container and estimate the number of containers going onto the Scottish market. The producer fee will therefore be higher for products that continue to use their existing, UK-wide label and barcode systems. This is to account for the costs of potential fraud – as items without a distinctive DRS barcode could be sold elsewhere in the UK but then used to claim a 20p deposit in Scotland.

Producer Registration

Producers must be registered in order for anyone to market, offer for sale or sell any of the producer's Scheme Articles to consumers in Scotland on or after 16 August 2023 – it will otherwise be a criminal offence, again punishable by a fine, to do so.

Producers must make an application for registration as a producer to SEPA, either directly or through CS. Applications for registration must be made by 28 February 2023. CS say that producers who want to register via them must begin the process by 17 February in order to hit that deadline.

If producers register independently then they must provide information about themselves, the number of Scheme Articles marketed or sold in the previous calendar year and predicted figures for the current year, and information about trade marks. 

Producers registering independently must also provide an operational plan setting out how the producer plans to meet its statutory obligations under the DRS. These plans are expected to be detailed and to demonstrate how producers can:

• set up a suitable collection service;
• reimburse return point operators for the deposits the operators have returned on the producer's behalf;
• pay reasonable handling fees to retailers and return point operators to cover the cost of collection and storage at return points;
• communicate to return points what must be done with scheme packaging when it is returned to them; and
• demonstrate that they can comply with the general and specific statutory obligations on producers (which we discuss further below).

It is likely that the preparation of operational plans will involve a significant expenditure of time and resource.  SEPA has issued helpful guidance on how to prepare operational plans. Producers should review that guidance while preparing their plans, if seeking to register independently.

Where producers register independently and meet the requirements we set out above, SEPA must approve any application for registration. There is a right of appeal to the Scottish Ministers in the event of any refusal. If a producer's application for registration is refused, it will not be able to sell Scheme Articles in Scotland. 

However, if producers register through CS then they do not require to provide this information directly to SEPA and do not require to prepare an operational plan. CS will deal with the registration requirements.

Scheme administrator

As scheme administrator, CS is responsible for submitting applications on behalf of producers and for the operational management of the DRS on behalf of its producer members.

If producers register through CS, then they must provide details to CS for onwards submission to SEPA. CS has provided a checklist setting out what details producers must provide it with for registration purposes. To register through CS, producers must provide details about their businesses, whether they are brand owners or importers, details of their products and payment of the registration fee.

CS has prepared a producer agreement that sets out how it will meet producers' statutory obligations under the DRS on behalf of its producers. The agreement also stipulates what CS requires of producers in order to carry out its functions as scheme administrator. The same terms are applicable to any producer utilising CS. Producers seeking to appoint CS as their scheme administrator will require to sign up to the agreement. A draft producer agreement was initially released by CS on 7 November 2022. In response to producer feedback, CS has implemented clarifying amendments to the text and we understand that the agreement is now in final form.  

As part of the producer agreement, producers must pay a "producer fee" to CS. That fee is paid to ensure that CS can carry out its functions under the producer agreement, and is based on the number of Scheme Articles that individual producers market. There are different rates for plastic, aluminium and glass Scheme Articles. It is worth noting that in late 2022 CS announced significant reductions in the rates for Scheme Articles, of up to 40% according to articles in the trade press.

Producer obligations – operating under the DRS

The 2020 Regulations also set out various general and specific obligations that producers must comply with when operating under the DRS. Producers require to set out how they plan to meet those requirements within their operational plans if they are not registered through CS.

If producers do appoint CS to discharge their obligations under the DRS, then it is CS, rather than individual producers, that is obliged to comply with the obligations set out below.

The general obligations in relation to registration include obligations to:

• submit any subsequent applications for registration timeously;
• provide any information reasonably requested by SEPA (regarding producer obligations);
• notify SEPA of any material changes to the information provided (under Schedule 1) within 28 days of the change;
• notify SEPA in writing when they wish to cancel the registration or when they have ceased to be producer. 

There are further operational obligations on producers, which can be summarised as follows:

• Record-keeping: producers must collect, and keep for at least four years from the date on which the information is collected, a record of key information concerning (i) the number of Scheme Articles first made available for marketing/sale in Scotland; (ii) the nature of the material used on scheme packaging (e.g. PET, plastic, glass, steel or aluminium), and (iii) the number of items of scheme packaging either returned to the producer or collected by the producer.
• Return obligations: producers must accept the return of any scheme packaging that was sold by it to a retailer/wholesaler for retail sale in Scotland. The producer must pay that retailer/wholesaler a sum equal to the deposit for each item of scheme packaging returned. Retailers and wholesalers must be able to identify the producer's scheme packaging and arrange for its return.
• Collection obligations: producers are obliged to collect that scheme packaging from return point operators (who will almost always be retailers), takeback service providers (i.e. online retailers) and hospitality retailers, and are required to pay them a sum equal to the deposit for each item of scheme packaging collected, along with a reasonable handling fee.
• Minimum collection targets: there are minimum targets on producers to collect scheme packaging, set out in the 2020 Regulations. Producers are required to meet these targets.

Producers who have registered through a scheme administrator

As mentioned above, where producers have appointed CS then it will comply with those statutory obligations. However, there are still some residual obligations on producers who have registered through CS. Those producers will still have to collect and provide to CS information on the number and type of Scheme Articles put into the Scottish market, and also supply any other information reasonably required by CS to allow it to meet its obligations.

Consequences of failing to comply

As noted above, Scheme Articles will not be capable of lawful sale, marketing etc. in Scotland from 16 August if the producer is not registered or if the Scheme Articles were not intended for retail sale in Scotland. Beyond that severe commercial consequences, there are also consequences for a producer that fails to comply with its regulatory obligations under the DRS.

If a producer fails to comply with its statutory obligations, SEPA can cancel their registration. SEPA is not obliged to do so but producers should note that it is a power that is available to SEPA.

SEPA can (but is not required to) also cancel a producer's registration if it fails to submit an application in accordance with the statutory rules, fails to charge a deposit on Scheme Articles, or supplies false information with its producer application.  There is a right to appeal to the Scottish Ministers against a cancellation decision, and SEPA must consider any representations made by the producer/scheme administrator before cancellation takes effect.

Any cancellation would mean that a producer would not be registered under the DRS, and so its Scheme Articles could not be sold in Scotland. Therefore, failure to comply with the obligations set out in the 2020 Regulations and discussed above could have severe implications for a producer's business in Scotland.

The contravention of certain provisions within the 2020 Regulations will, once the DRS comes into force, also amount to a criminal offence punishable by a fine. In addition to those mentioned above, the list of potential offences includes:

• Failing to charge a deposit;
• Failing to clearly display information where a Scheme Article is displayed for sale stating that (i) the article is a Scheme Article to which the deposit-charging obligation applies or (ii) the amount of the deposit;
• Knowingly providing false information in an application for registration as a producer (or approval of a scheme administrator);
• Failing without reasonable excuse to comply with the statutory obligations set out above.

It should be noted that the Scottish Government has not yet brought into force the provisions creating offences in respect of the DRS. However, failure to comply with producers' statutory obligations under the DRS could in future result not only in the cancellation of a producer's registration, but also in criminal proceedings.

Conclusion

Once the DRS comes into effect in August 2023 it will impose a number of compliance obligations on producers. Those obligations are detailed and are likely to require significant planning in order to ensure compliance. In particular, producers must ensure they are registered either with SEPA directly or with CS in good time (i.e. by the end of February 2023). Should you have any question about producer obligations or any other aspect of the DRS, please do not hesitate to get in touch with a member of our team. Or, if you want to hear more about producers' obligations under the DRS, you can sign up for our upcoming webinar on 18 January.