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UK’s European Scrutiny Committee shares concerns over EU’s iOSS reform

The UK’s European Scrutiny Committee (ESC) has responded to the European Union’s (EU’s) proposed reform of the import One Stop Shop (iOSS), highlighting the possibility that GB businesses selling in the bloc could be affected.

In May 2023, details of a potential expansion of the EU Customs Union were shared by the European Commission. As part of this draft legislation, a widening of the iOSS was also put forward.

While agreement for such reforms has not yet been reached, the ESC has used its first report of the 2023-24 parliamentary session to highlight potential friction for UK businesses as a consequence of iOSS growth.

What is the iOSS?

The EU introduced an iOSS mechanism in 2021. It is designed to simplify the way e-commerce businesses based outside the EU’s Single VAT Area sell goods to consumers within it via the internet.

By using the iOSS, e-commerce providers can account for import VAT across all 27 EU nations through a single platform. The system allows online sellers to charge VAT at the point of sale via their online platform, using a tax registration in a single EU country.

The iOSS system eliminates the risk of deliveries being delayed at customs at the EU border due to unpaid import taxes. It also means companies do not require VAT registrations in every EU country in which they sell goods.

However, the iOSS can only be used in accordance with certain restrictions, including:

  • E-commerce platforms can only use the iOSS for B2C sales of imported goods with a value of €150 or less.
  • iOSS can never be used for excise sales, i.e. tobacco, alcohol, fuel.
  • Businesses based outside the EU that wish to use the iOSS must pay for a fiscal representative within it.

In February 2023, as part of the Windsor Framework, the UK government agreed to adopt an iOSS mechanism in Northern Ireland.

How is the EU proposing to expand it?

The European Commission has revealed plans to abolish the €150 threshold on the value of goods accounted for under the iOSS.

If the proposal is approved and becomes law, it would mean all e-commerce sales (other than excise products) become eligible for the iOSS scheme, drastically expanding its scope and size.

In parallel with this change, the EU is proposing an extension to the deemed supplier rule. This would result in online platforms becoming legally responsible for collecting VAT from its sales and remitting the tax to the relevant EU tax authority.

What concerns does the ESC have?

In its new report, the ESC notes there are two issues relating to an expanded iOSS that are relevant to the fortunes of UK businesses.

1) The Northern Ireland Protocol

The Northern Ireland Protocol agreed by the UK and the EU in 2020 (and later updated by the Windsor Framework in 2023) requires many elements of the EU’s VAT regulations to be applied in Northern Ireland by default.

As it stands, companies operating in Northern Ireland that sell goods in EU countries are treated in legal terms as though they are based within the EU. Additionally, the agreement states that the UK does not need to run an iOSS system for e-commerce sales between it and Northern Ireland; meaning these sales are deemed to be domestic transactions.

As such, the ESC believes the proposed expansion of the iOSS is likely to have an impact on e-commerce sales from Great Britain into the EU and on sales from outside the EU into Northern Ireland.

It also notes the proposed changes to the iOSS are outside the scope of the Stormont Brake; a mechanism agreed under the Windsor Framework by which the UK is able to veto the application of certain amendments to EU law in Northern Ireland.

2) The cost of fiscal representation

The ESC also believes GB companies may be affected by changes to VAT rules on goods sold to the EU from outside of it.

Current rules allow British businesses selling direct to consumers in the EU to use the iOSS to reduce VAT barriers; reducing risk at the EU border and removing the need for multiple VAT registrations.

However, they must still pay for a fiscal representative in the EU – a commitment that has been described by the British Chambers of Commerce as “prohibitively expensive”. The ESC believes this acts as a barrier to trade and disproportionally affects SMEs.

EU law permits the need for a fiscal representative to be removed – something the UK government has made repeated requests for. However, the EU has so far refused apply a waiver.

In conclusion…

The ESC believes the precise economic impact of the iOSS proposals will only be known if and when EU member states reach agreement on new legislation.

However, it has already asked the government for an update on its efforts to secure an exemption for GB businesses from the requirement to pay for a fiscal representative in order to make e-commerce sales to the EU under the iOSS.