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

In this blog, we discuss the restrictions the DRS will place on the sale of drinks products (including by retailers) and set out the key obligations on retailers and what they will need to do to comply, with reference to the range of businesses that will be considered retailers under the scheme.

Retailer obligations – introduction

The Deposit and Return Scheme for Scotland Regulations 2020 ("the 2020 Regulations") impose various mandatory compliance obligations on retailers (including online retailers and the hospitality sector) in respect of the vast majority of drinks sold in Scotland in single-use containers. The DRS applies not just to retailers based in Scotland, but also to retailers located anywhere (in the UK or internationally) who supply products into the Scottish market.

The DRS will impose a variety of obligations and restrictions on retailers, some that are applicable throughout the supply chain and some that are specific to retailers. We will cover the general categories before turning to the specific ones.

Who is a retailer?

Under the 2020 Regulations, a retailer is defined as “a person who markets, offers for sale or sells a Scheme Article to a consumer in Scotland.” This most obviously includes face-to-face retail, but also covers online or distance sales, sales in a hospitality setting and sales through a vending machine. It is important to emphasise that, because online retail is within scope, any online business (wherever located) that markets, offers or sells Scheme Articles to consumers in Scotland will be within scope.

What products can retailers lawfully sell in Scotland under the DRS?

The DRS will cover everything from a fizzy drink can to a bottle of whisky (though not HDPE plastic containers, such as are used for milk and some other drinks, or lined cardboard containers such as Tetrapak). It will apply 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.

If a drink would meet the first two parts of this definition, but was not made available by the producer to be marketed, offered for sale or sold "for the purposes of its retail sale in Scotland", it will – as of the scheme 'go live' date of 16 August 2023 – be a criminal offence for any person (including a retailer) to market, offer for sale or sell such a drink to a consumer in Scotland. It will also be a criminal offence, from 16 August, to market, offer for sale or sell a Scheme Article to a consumer in Scotland if the producer of the article is not registered under the scheme (our post on producer obligations explains who qualifies as the producer of a given product, what registration entails, and what making products available for retail sale in Scotland might involve). These are intended to be anti-avoidance provisions, to keep containers out of the Scottish market if the producer has not registered or has not paid the applicable deposit into the system.

Each offence will be punishable by a fine, though there will be a defence where the person can show they took all reasonable precautions and exercised all due diligence to prevent the offence being committed. This puts a potentially heavy burden on retailers to check that the producer of any products they sell has registered: SEPA has said it will publish and maintain a register of producers after the registration window closes in March 2023.

It is harder to see how retailers will be able to tell whether products they are selling were made available by the relevant producer for retail sale in Scotland. Retailers may be limited to seeking assurances from their suppliers, who may then need to refer the question further up the supply chain. This will be a particularly tricky issue where 'Scottish' items are visibly indistinguishable from 'non-Scottish' items, which will still be permitted (albeit discouraged) under the scheme. The scheme administrator (Circularity Scotland Limited) has produced a discretionary logo, and has advised that new labelling and barcodes will improve the security of the scheme, but producers are not obliged to adopt any Scotland-specific labelling.

The above offences will not apply to articles that are first made available by the producer to be marketed, offered for sale or sold (i.e. put into the supply chain) prior to 16 August, as these will fall outside the second part of the definition and so will not be Scheme Articles (indeed, the 2020 Regulations refer to them as "non-scheme articles"). It will therefore still be possible for retailers to market, offer and sell such products after the scheme has gone live (though see below for the information obligations in respect of non-scheme articles).

Charging the deposit

The deposit charging structure is intended to be a closed loop system which is 'cost neutral' to all actors in the supply chain (i.e. nobody should be left 20p out of pocket), with the deposit and the product expected to flow in opposite directions at each stage. An example of this flow would be as follows:

  • the producer pays a 20p deposit to the scheme administrator* for each bottle / can put into the supply chain for the Scottish market;
  • the producer charges the 20p deposit for each bottle / can sold to wholesalers;
  • each wholesaler charges the 20p deposit on every bottle / can sold to retailers;
  • each retailer charges the 20p deposit on every drink sold to consumers;
  • the consumer returns the empty bottle / can to a retailer, and gets the 20p deposit back;
  • the scheme administrator* arranges to collect the article and reimburse the 20p to the retailer.

(*The example assumes the producer is signed up with the scheme administrator.)

The deposit will be chargeable at each stage of the supply chain – any person who markets, offers for sale or sells a Scheme Article in Scotland must charge the deposit. It will be a criminal offence to fail to do so, again subject to a defence of having taken "all reasonable precautions and exercised all due diligence" to avoid committing the offence (which in this case would probably mean having good reason to believe the deposit was not in fact chargeable in respect of the product).

The deposit will need to be charged on each individual Scheme Article sold – i.e. the deposit amount on a six-pack of soft drink cans will be £1.20.

The deposit will not have to be charged if the article is marketed, offered for sale or sold in Scotland in an "export shop", or exclusively for consumption on the premises of sale, or if the article is intended for retail sale outside Scotland (though by definition that will not apply at the retailer end of the supply chain).

The obligation to charge a deposit will also not apply, at any level of the supply chain, to the sale of 'non-scheme articles' (though that is again subject to the below information obligations).

Information obligations

Any person marketing, offering for sale or selling a Scheme Article will need to clearly display information, wherever they display the article for sale, indicating that it is a Scheme Article to which the deposit obligation applies, and the amount of the deposit. The requirement to display the deposit amount will need to be reconciled with price marking rules that require display of the final selling price.

In relation to a non-scheme article (i.e. one put into the supply chain before 16 August), the retailer must communicate to the purchaser at the point of sale that it is not a Scheme Article under the DRS and that it cannot be returned for a deposit.

As with the deposit obligation, the above will not apply in an export shop or to articles exclusively for consumption on the premises or intended for retail sale outside Scotland.

These obligations will apply at each stage of the supply chain (though "display for sale" is most obviously relevant to retailers). There will then be a specific obligation on retailers to clearly display information about how a deposit can be redeemed (compliance with which will vary depending on the type of retailer, as we explain below).

Operating a return point

The policy intention is to make it as straightforward as possible for consumers to return Scheme Articles and collect their deposit. As such, all retailers who sell Scheme Articles will be obliged to operate a "return point" at any retail premises where the retailer sells the articles. A return point means a place where a person can return an empty Scheme Article and receive the deposit back. Consumers will not need to have purchased the bottle or can in question, and will be able to take it to any return point to claim their deposit back. A return point operator will have a legal obligation to accept returned Scheme Articles (subject to the exclusions noted below).

Return point exemptions

Certain premises will not need to operate a return point: export shops; premises where Scheme Articles are sold solely by way of a vending machine or a distance retail sale (both covered further below); hospitality premises (also see below) that do not sell any Scheme Articles for consumption off the premises; and premises granted an exemption by the Scottish Ministers. The latter will fall broadly into two categories: proximity-based exemptions and environmental-health-based exemptions.

A proximity exemption may be granted to a retailer if there is an alternative return point within a "reasonable proximity", the operator of which has agreed to accept containers on the retailer's behalf and which would still allow consumers reasonable access to a return point and would not significantly impair compliance with collection targets.

An exemption will be possible on environmental health grounds if a retailer's premises are not suitable for operating a return point without significant risk of breaching another legal obligation relating to food safety, health and safety, fire safety, environmental protection or public health.

Guidance and application forms in relation to exemptions are available on the Zero Waste Scotland website.

Any retailer that is granted an exemption must communicate this through appropriate signage, informing the consumer that it is not operating a return point and also advising the consumer on the relevant alternative return point (under a proximity exemption) / the nearest return point (under a health exemption).

Mechanics of return points and retailer compliance

Return points can be manual (e.g. a customer hands the container over the counter and receives the 20p back); or through a machine such as a reverse vending machine (RVM). At manual return points, the return point operator must refund the 20p deposit for each Scheme Article returned by the consumer. SEPA's guidance states that this refund can be offered by way of a charitable donation, store points or in-store vouchers, or wireless transfer. However, the retailer must ensure that the consumer is presented with the option of a cash refund (which may be challenging for retailers who have gone card-only).

Consumers will therefore be reimbursed from the retailer’s own funds. The retailer will then retain empty Scheme Articles for collection by the scheme administrator (and Circularity Scotland has awarded a contract to Biffa to handle the collections) or the producer directly. The retailer will then be reimbursed the deposit by the scheme administrator for each of the articles it returns. This means that all participants – the producer, the wholesaler, the retailer, and the consumer – will have their 20p back and no-one will ultimately be left out of pocket (though there will of course be cashflow implications for each party).

Retailers operating return points will have certain other compliance obligations, in addition to accepting returns and refunding deposits: they will also be obliged to retain scheme packaging for collection by the scheme administrator (or producer) and clearly display information on complaints procedures concerning their return point operation, as well as SEPA's contact details.

Exclusions to retailers' refund obligations

A retailer operating a return point will be able to refuse to accept a return in the following scenarios.

  • The container is soiled, broken, not empty or not identifiable as being part of the scheme. This last point would cover, for example, a glass bottle from which all the labelling had been removed, as well as non-scheme articles (e.g. products purchased in England being returned to retailers in Scotland) – the standard agreement between producers and the scheme administrator requires the former to ensure that all Scheme Articles can be identified as such). A retailer may therefore not be required to accept products that are not recognised by their collection system.
  • The return point is full and waiting for collection or uplift, because collections have not been carried out as expected.
  • A consumer attempts to return a number of empty containers that is "disproportionately greater" than the number of drinks the retailer would normally sell in a single transaction. This is a broadly worded carve-out, which is presumably intended to avoid smaller retailers being overwhelmed by large return volumes that they may not have the storage space (or indeed the cashflow) to handle. The threshold for refusal will differ significantly for different retailers: for example, a small shop that ordinarily only sells one or two bottles at a time will have a far lower "single transaction" number than a large supermarket that regularly sells several multi-packs at a time. We are not aware of specific guidance addressing this point, and so it will be left to retailers to self-assess by reference to their own average customer sales volumes.

Handling fee

The 2020 Regulations provide for retailers operating return points to be paid a "reasonable handling fee" by the scheme administrator (or producer) for collecting and storing each item of scheme packaging collected. This fee is intended to cover the costs / value of materials, floor space and/or staff time dedicated to collecting and storing returned items, as well as the costs relating to any reverse vending machine used by the retailer. Circularity Scotland has set a flat handling fee of 2.69p per item (varying for automated returns). This approach is currently the subject of a judicial review challenge.

Specific retailer categories

The 2020 Regulations contain specific provisions applying to, and will have specific practical consequences for, particular categories of retailer, namely: (i) online retailers; (ii) hospitality retailers; and (iii) vending machine sales.

  • Online retailers

The general retailer obligations under the DRS also apply to a business that sells Scheme Articles to consumers through sales on its own website (regardless of whether that business has a physical location in Scotland), and to the operator of an online marketplace through which others offer Scheme Articles for sale.

In each case the relevant obligations will fall on the "operator", meaning "the person who controls access to, and the content of, the website or online marketplace". This includes the prohibitions on selling articles that the producer had not made available for sale in Scotland, or that are produced by an unregistered producer. The relevant offence would therefore be committed by the operator (which may put online marketplace operators in a difficult position given they are primarily a conduit for third party sales).

The operator will also be liable for a failure clearly to display information on the website / online marketplace about the applicability of the DRS (or not, in the case of non-scheme articles) and the amount of the deposit, as well as how the deposit can be redeemed.

The 2020 Regulations treat online sales as a sub-category of "distance retail sales", being a sale of a Scheme Article to a consumer in Scotland "where the site of delivery and the site of sale are at a distance from each other". Online will constitute the majority of distance sales, but the concept would also include, for example, sales made over the telephone.

Distance retailers do not need to operate return points. Instead, they will have to offer a "takeback service" to consumers in Scotland allowing the collection of any drink containers purchased from the retailer, and the reimbursement of the deposit. The takeback service must be free of charge to the consumer, though the retailer will be entitled to be paid a reasonable per-item handling fee by the scheme administrator / producer to cover the costs / value of materials, floor space and/or staff time dedicated to collecting and storing returned items, as well as delivery costs and associated vehicle costs.

Crucially, the takeback service will be offered from the point of delivery (i.e. if a customer had a Scheme Article order delivered to their home address, the retailer will only need to collect the packaging from that address). An online retailer will be able to provide the takeback service itself or have someone else carry it out on its behalf. Customers buying drinks through online sales will not have to use the retailers' takeback service, as they will remain free to return their empty containers to any return point.

However, the scope of the takeback obligation is currently in limbo. On 15 December 2022 the Minister in charge of the scheme confirmed that she intends to amend the 2020 Regulations such that only the largest supermarkets will have a takeback obligation, and that will be phased in between 2023 and 2025. The amending regulations are awaited and will hopefully be in place well in advance of 16 August, but in the meantime SEPA has issued a holding statement explaining that it will not take enforcement action against any retailer that does not offer a takeback service while amendments to that part of the legislation are being considered. Online and other distance retailers should keep a close eye on this issue, both to look out for amendments and because SEPA's position could be changed at any time.

  • Hospitality retailers

The DRS will apply to the sale of Scheme Articles in a hospitality setting, but the scope of the retailer's obligations will vary depending on the business model of the hospitality retailer. There is an important distinction to draw between a "hospitality retailer", as defined within the 2020 Regulations, and hospitality businesses more generally. In the legislation, a "hospitality retailer" means a business that sells a Scheme Article exclusively for the purpose of consumption on the premises of sale. So this term will apply to, for example, pubs and restaurants (as well as venues such as cinemas and theatres) that never sell drinks for takeaway. It will also apply to, for example, a café that sells drinks for consumption on or off the premises, but only in respect of those drinks sold for on-premises consumption.

Sale of drinks for consumption on the premises

Hospitality retailers will still have to comply with the obligations only to sell drinks that were produced by a registered producer, and made available by the producer for sale in Scotland. They will also still pay the 20p deposit to their supplier for each Scheme Article they purchase.

However, Scheme Articles marketed, offered and sold exclusively for consumption on the premises of sale will not be subject to the 20p deposit. The obligations to display information about the application of the DRS to those articles, and to communicate information about its non-application in the case of non-scheme articles, also will not apply.

Accordingly, if a hospitality retailer only sells Scheme Articles exclusively for consumption on the premises, it will never need to charge a deposit or display any information. Likewise, such a retailer will not need to operate a return point or display information about how deposits can be redeemed.

The deposit will not need to be charged for Scheme Articles that are for on-premises consumption because it is assumed that the products will not leave the premises. In this scenario, the hospitality retailer collects the empty item and stores it for pick-up by the administrator / producer, who then pays the deposit sum back to the hospitality retailer.

Sale of drinks for off-site consumption

Businesses in the hospitality sector that do sell drinks for takeaway (i.e. for consumption off the premises of sale) will essentially be treated no differently from shops in respect of those takeaway items. The 20p deposit therefore will need to be applied to products sold for off-site consumption, on top of which the business will need to display information about the application of the DRS to those items (or not, in the case of non-scheme articles) and the deposit amount.

Accordingly, hospitality businesses that sell Scheme Articles for a mix of on-site and off-site consumption will have to ensure appropriate product separation, including being clear with customers that drinks sold without a deposit applied must not be taken from the premises (to ensure the retailer both complies with the law and is not left 20p out of pocket) and that a deposit must be paid on all drinks sold for consumption off-site. Such retailers will also need to operate a return point (accepting empty items regardless of whether the business sold them) and display information about how deposits can be redeemed. The reasonable handling fee for articles sold for on-premises consumption may only take account of the cost of materials used in collection and storage, unlike the fees for return points and takeback services, which as noted above can take account of costs relating to floor space and staff time.

  • Vending machine sales

Vending machine sales will be subject to the obligations (a) only to sell drinks produced by a registered producer and made available by the producer for sale in Scotland, (b) to charge a 20p deposit on all Scheme Articles and (c) to display information (on the machine) about the application and amount of the deposit and how to redeem it. These obligations will apply to either (i) the owner of the vending machine (if their name and address appears on the machine) or (ii) the business that manages and controls the premises where the vending machine stands. However, the obligation to operate a return point will not apply to premises where Scheme Articles are sold solely via vending machine.

Conclusion

Once the scheme goes live on 16 August 2023, all retailers that sell Scheme Articles in Scotland will take on compliance obligations under the 2020 Regulations. It is essential that retail businesses (including online retail and the hospitality sector) get plans in place now for the impact of the new scheme, taking into consideration the above compliance obligations.

If you would like more information on the DRS, or assistance with your compliance obligations, please do not hesitate to get in touch with our team.

Contributors

Charles Livingstone

Partner

Grant Strachan

Partner