The Incoterms® are a set of 11 individual rules issued by the International Chamber of Commerce (ICC) which define the responsibilities of sellers and buyers for the sale of goods in international transactions. Of primary importance is that each Incoterms rule clarifies the tasks, costs and risks to be borne by buyers and sellers in these transactions. Familiarizing yourself with Incoterms will help improve smoother transaction by clearly defining who is responsible for what and each step of the transaction.

The ‘Total Value’ of your goods liable for Import Duty and/or VAT depends on the ‘Terms of Sale’ or ‘Inter-company Terms (Incoterms), between yourself, the importer (or buyer) and the exporter (or seller), and clearly outlines as to who is paying for what.

When buying any goods, you would usually pay either an all-in price, one which includes the cost of shipping to the UK. Or alternatively, there could be the situation whereby the price you pay, only covers the cost of the goods and then you may have to pay the seller an extra charge for shipping them to the UK. Or, perhaps you are just paying the seller for the cost of the goods and you’re sorting out the shipping costs out yourself, with the company who has shipped them from the country of origin to the UK port. These 3 options are 3 different examples of ‘Inco-terms’ (or ‘Terms of Sale’) and perhaps, are the most commonly used ‘Inco-Terms’, (although there are many more), and they each affect what Customs deem as the value of your goods on which import duty and / or VAT will be paid (if applicable).

The seven Incoterms® 2020 rules for any mode(s) of transport are:

EXW – Ex Works (insert place of delivery)

FCA  – Free Carrier (Insert named place of delivery)

CPT  – Carriage Paid to (insert place of destination)

CIP –  Carriage and Insurance Paid To (insert place of destination)

DAP – Delivered at Place (insert named place of destination)

DPU – Delivered at Place Unloaded (insert of place of destination)

DDP – Delivered Duty Paid (Insert place of destination).

Note: the DPU Incoterms replaces the old DAT, with additional requirement for the seller to unload the goods from the arriving means of transport.

The four Incoterms® 2020 rules for Sea and Inland Waterway Transport are:

FAS – Free Alongside Ship (insert name of port of loading)

FOB – Free on Board (insert named port of loading)

CFR – Cost and Freight (insert named port of destination)

CIF –  Cost Insurance and Freight (insert named port of destination)

What Incoterms Do Not Cover

As noted above, Incoterms are generally incorporated in the contract of sale, however they do not:

  • address all the conditions of a sale;
  • identify the goods being sold nor list the contract price;
  • reference the method nor timing of payment negotiated between the seller or buyer;
  • when title, or ownership of the goods, passes from the seller to the buyer;
  • specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country; and
  • address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms.