Are cup deposits subject to VAT? What HMRC says about returnable containers and refundable deposits

A cup deposit looks like a float: a small amount taken at the bar and handed back at the return point. HMRC's VAT guidance shows it is less simple than that. The treatment depends on why the charge is made and when it is charged, and the same amount can be outside VAT, subject to VAT as payment for the use of a container, or subject to VAT as a charge for a container that was not returned. This article sets out what the pages say, and where they stop.

Why the charge was raised

The page on deposits in HMRC's VAT Supply and Consideration manual (VATSC06120) starts from a general rule and an exception. Deposits are generally taxable, and the exception is a deposit taken as security, "for example against the safe return of goods on hire", which is not consideration for a supply. On returnable containers, the same page says: "It is important to establish exactly why the charge has been raised."

Two cases follow. If the charge has been raised purely to ensure the safe return of the container, and it is refunded on its return, it can be treated in the same way as a security deposit. If it has been raised to cover the loan, hire or use of the container, it represents consideration for a supply of services, even if it is refundable when the container is returned. Where there is any doubt over what is supplied, the manual says it will be necessary to obtain a copy of the relevant agreements to establish the basis of the charge.

The current VAT guide, Notice 700, states the same split at paragraph 8.2, in firmer terms and without the instruction to obtain the agreements. The page was last updated on 25 June 2026, but that update concerned another section, and the change history names no change to paragraph 8.2. An additional charge made with a supply of goods for their container, to make sure it is safely returned and refunded on its safe return, is not subject to VAT. If the charge has been raised to cover the loan, hire or use of the container, it would be subject to VAT at the standard rate.

When the cup does not come back

For a security deposit, the manual says that if the deposit is forfeited, in total or in part, the payment is outside the scope of VAT, for example because the customer has broken the terms of the contract by damaging the goods. Paragraph 14.2.3 of the VAT guide agrees: a deposit taken as security for the safe return of goods hired out, which is either refunded when they are returned safely or forfeited to compensate for loss or damage, creates no tax point. Neither passage mentions cups or other containers, so applying them to a cup that is not returned is our reading.

The pages on returnable containers in HMRC's VAT Traders' Records manual (VATREC17022 to VATREC17024) set out three further arrangements. When a separate charge is made for a container, or for its use, as it is sent out, VAT must be charged on the container even if the charge is refundable, and if it is refunded on return the VAT in the original charge may also be refunded, by credit note or by an adjustment on a later invoice. When no separate charge is made when the container is sent out, but one is made later if it is not returned, VAT on the container must be charged when the charge is raised. And when containers are not separately charged for, either when they are sent out or afterwards, no separate charge of VAT is required, even where the supplier normally expects containers back and one is not returned in a particular instance. The last of these carries a pointer to paragraph 8.2 of the VAT guide for containers that constitute more than normal or necessary packaging. The introduction to these pages (VATREC17021) describes them as the acceptable procedures for invoicing and charging VAT on returnable containers, and says they do not apply to containers supplied by the public to retailers using one of the retail schemes described in VAT Notice 727. Reading them across to a bar's cup deposit is our reading.

Paragraph 8.13.1 of the VAT guide adds a general rule: VAT is due on all charges, deposits and fees which are full or part payments for a supply of goods or services. Paragraph 14.2.3 puts it the other way round, saying most deposits serve primarily as advance payments and create a tax point, and that some types are not consideration for a supply.

Lining the cup schemes up against the pages

Zero Waste Scotland gives four examples of how a reusable cup scheme could work: free borrowing with a return, a small deposit repaid on return, an app that charges the customer if the cup is not returned, and an app deposit refunded to the app. Its guidance says the cost of the deposit is designed to cover the cost of the cup, allowing non-returned cups to be replaced. Our guide to deposit schemes at events covers the published results.

How those four examples line up with the HMRC pages is our reading, and it is not HMRC's own list. A free borrow with no charge looks like the arrangement with no separate charge. A charge made only when the cup is not returned looks like the separate charge made only if the container is not returned. A deposit repaid on return can sit on either side, depending on whether it is security for the cup's safe return or a separate charge for the cup or its use. Zero Waste Scotland does not say whether a deposit designed to cover the cost of the cup is security for its return or payment for the cup, and the deposits page asks why the charge was raised.

None of the HMRC pages read deals with a cup that the customer is invited to keep as a souvenir. Three paragraphs of the VAT guide are worth reading alongside the container pages. One is paragraph 8.13.1, described above. Another is paragraph 8.2, the one the last container page points to: it treats normal and necessary packaging as part of the goods it contains, treats packaging that is more than normal and necessary as a multiple supply on which VAT is due, and says this applies to storage containers and other types of packaging which could be sold separately. The third is paragraph 14.4, on goods supplied on sale or return, approval or similar terms, which concerns the tax point: it says a payment which is not returnable will normally indicate that the customer has adopted the goods, adoption meaning that the customer indicates a wish to keep them, and that a deposit required as a condition of delivery, which is repayable if the goods are returned, does not constitute adoption. The guide does not say which of the three, if any, fits a cup the customer keeps. On returnable containers, HMRC's instruction where there is doubt over what is supplied is to obtain the relevant agreements to establish the basis of the charge, and the pages do not say what counts as an agreement at a bar.

Not the same as the 2027 scheme

The statutory Deposit Return Scheme for drinks containers already has VAT rules of its own, in sections 55B to 55D of the Value Added Tax Act 1994, and a revised framework is in preparation. On 13 July 2026 HMRC published a policy paper with draft legislation saying producers and importers would no longer account for VAT on deposits under a statutory scheme, that the scheme administrator would account for it instead, and that VAT would only be due on deposits not returned to the consumer. The paper says the change will be introduced in Finance Bill 2026-27 and take effect when the schemes start, which it expects in Autumn 2027. Its stated scope is supplies made under a statutory scheme, and it does not mention a venue's own cup deposit. Our guide to the 2027 deposit return scheme explains why the two are different questions.

What to settle before the event

Decide what the charge is for: security for the return, hire of the cup, or the price of a cup that may be kept. Make sure the wording at the bar, on any token and in any app says the same thing. Then check the treatment with an accountant or with HMRC, because this article summarises published guidance and is not advice on a particular scheme. If you would rather not own the cups or run a wash, the hire service, which starts at 1,000 cups, makes collection, washing and drying support available after the event, and a quote with your volumes shows what each route involves.

Where this stands

This was checked on 30 September 2026. The pages on returnable containers show last-update dates of 2016 and January 2025, and the change note for the page on deposits in the VAT Supply and Consideration manual is dated February 2019, so the two-way split was read against the VAT guide, which states it at paragraph 8.2. The guide repeats only that split, and its paragraph 8.2 is the one VATREC17024 points to; the arrangement for a charge made only if the container is not returned rests on VATREC17023 alone. The guide's page was last updated on 25 June 2026, while its change history records paragraphs 8.13.1 and 14.2.3 as amended on 27 February 2019 and names no later change to them. The July 2026 deposit return scheme paper publishes draft legislation that, it says, will be introduced in Finance Bill 2026-27.