What are Incoterms and how can they help my business?

Incoterms (International Commercial terms) are a series of pre-defined terms widely used in international business transactions. As of 1 January 2021, these Incoterms are essential to Scottish businesses trading with the EU and third countries as different countries do business in different ways. So, it's a good idea for businesses to have clear written contacts with customers and suppliers to reduce the risk of any misunderstandings. 

You should find the Incoterms that work for your business. Consider if your team are experienced in export, or less so? Do they have the additional time for export work? Consider your buyer, are they a small business with little export expertise?

If you have a freight forwarder or customs agent, they can handle customs declarations on your behalf or on behalf of the buyer. You, or your buyer need to instruct them.

Despite the deal made between the EU and the UK, the Incoterms you choose will define whether the seller or buyer is responsible for:

  • Arranging and paying for transport
  • Bearing the risks
  • Clearing goods for export and import
  • Paying import duty and VAT
  • Transport in the buyer country to the place of destination
  • Storage costs

Consider how best to plan for goods delayed in customs - by bad weather, public holidays, damage, loss, crime etc.

Glossary of Incoterms:

Carriage Paid To (CPT)

Exporter arranges transport and insurance to the named place and clears goods for export. The risk and costs transfer to the buyer upon delivery to the first carrier. Buyer pays transport costs in own country following arrival at named place and pays import duty and VAT. Buyer may arrange insurance from this point where the carrier takes charge of the goods. You should check who pays terminal handling charges.

Carrier and Insurance Paid To (CIP)

Exporter pays and arranges for the carriage and insurance to  named overseas destination point. The risk transfers to buyer when the goods are handed over to the first carrier. Buyer pays import duty and VAT. Exporter clears goods for export. The default level of insurance cover under CIP is Institute Cargo Clauses (A). You should check who pays terminal handling charges.

Cost and Freight (CFR)

For water transport only. Exporter pays the costs and freight to bring goods to named overseas port of destination and load on board vessel. The risk transfers to the buyer at this point who pays costs, including import duty and VAT. Exporter clears goods for export but is not responsible for insuring the goods for the main transport.

Cost, Insurance and Freight (CIF)

This is the same as CFR above. However, exporter must also obtain and pay for the insurance from the UK port to destination port. The default level of insurance cover under CIF is Institute Cargo Clauses (C), a minimum level which is possibly commercially unrealistic. Therefore, the level of cover may need to be addressed additionally in the commercial agreement.

Delivered at Place (DAP)

Useful for experienced Scottish exporter and inexperienced EU buyer. Exporter pays freight costs,  bears risk, and clears goods for export to the named place. Risk transfers from exporter to buyer when the goods are made available for unloading; unloading is at the buyer’s risk. Buyer is responsible for responsible for import clearance, import duty and VAT, transport costs in own country, following arrival at named place.

Delivered at Place Unloaded (DPU)

Exporter arranges transport and delivery of the goods. Exporter is specifically required to unload the goods at this destination. Risk transfers from exporter to buyer when the goods have been unloaded. The risk and responsibility also transfer to the buyer for customs clearance in the importing country at their own cost and risk. Buyer pays duty and VAT.

Delivered Duty Paid (DDP)

Suitable only for experienced Scottish exporter with EU EORI and EU VAT number, and who has business presence in destination country. Some EU countries require an EU fiscal representative. Exporter is responsible for delivering goods to named place in the buyer’s country. Exporter pays all costs in bringing goods to destination, including clearing for import and export, and duty and VAT payment. Risk transfers from exporter to buyer when goods are made available to buyer, ready for unloading at named destination.

EX Works (EXW)

Useful for inexperienced Scottish exporters and experienced EU buyers. Exporter makes goods available at the seller’s location. Buyer is responsible for collection and all the transportation costs, and risk transfers from exporter to buyer from collection up to delivery at destination, the buyer does all the customs declarations and pays the duty and VAT.

Free Carrier (FCA)

Useful for inexperienced Scottish exporter and experienced EU buyers. Exporter is responsible for loading of goods from own premises and arranges transportation to the named place: port, terminal, or forwarder’s warehouse. Delivery, costs, and risk transfer to buyer when the vehicle arrives at this place and the carrier is responsible for unloading the goods. Exporter is responsible for export clearance.

Free Alongside Ship (FAS)

For water transport only. Useful for less experienced Scottish exporter as exporter transports goods to ship and must place the goods alongside the ship at the named UK port or inland waterway. Exporter clears the goods for export. The risk then transfers to buyer who is responsible for loading the goods from this point, buyer does import clearance and bears all costs, duty, and VAT from this point.

Free on Board (FOB)

For water transport only. Exporter is responsible for all transport and costs including clearing goods for export, up until the goods are loaded on to a vessel at the named UK port or inland waterway. Once goods have been loaded onto vessel, the costs and risks involved in the onward shipment, including import duty and VAT are transferred to buyer.

Prepare your business for Brexit 

Brexit Checklist

Support for export and customs documentation

Conformity assessment process and your business