What Incoterms actually decide

If you buy or sell goods across borders, you will have seen the three-letter codes scattered across quotations, purchase orders and freight invoices: FOB, DAP, DDP, EXW. These are Incoterms, published by the International Chamber of Commerce. The current edition, Incoterms 2020, has applied since 1 January 2020, and it remains the version most UK contracts reference.

Stripped back, an Incoterm answers one question: at what point does the seller stop being responsible and the buyer take over? In practice that breaks down into four practical elements:

• Costs — who pays for carriage, loading, unloading, terminal handling, export and import clearance, duties and taxes.
• Risk — the precise point at which the goods become the buyer's problem if they are lost or damaged.
• Customs formalities — which party acts as exporter and which as importer of record, and who files the declarations.
• Insurance — whether either side is obliged to arrange cover, and at what level.

Just as importantly, Incoterms say nothing about who owns the goods, when payment falls due, which law governs the contract, or who carries product liability. Those sit in your terms of sale and your commercial agreement, and mixing them up with Incoterms is one of the most common sources of argument we see.

The two families of terms

Incoterms 2020 splits into two groups, and using a term from the wrong group is a classic error.

• Any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP.
• Sea and inland waterway only: FAS, FOB, CFR and CIF.

The maritime terms are designed for bulk and breakbulk cargo loaded directly onto a vessel at a port. If your goods travel in a container that is stuffed at an inland depot, trucked to Felixstowe, Southampton or London Gateway, and then shipped, FOB is usually the wrong choice. Risk under FOB passes only when the goods are on board, which leaves a long, awkward gap while your container sits in a yard. FCA, with a named place such as your forwarder's depot, handles that scenario far more cleanly.

The terms UK traders meet most often

• EXW (Ex Works) — the seller makes the goods available at their premises and does little else. The buyer collects, loads and handles the export declaration. That last point matters: the overseas seller is normally the only party able to file the export declaration in their own country, so EXW can leave you stuck.
• FCA (Free Carrier) — the seller delivers to a named place, often a haulier or forwarder, and completes export clearance. The workhorse of containerised trade.
• CPT and CIP — the seller pays carriage to the destination, but risk passes when the goods are handed to the first carrier. Under CIP the seller must arrange all-risks cover (Institute Cargo Clauses A); under CPT there is no insurance obligation at all.
• DAP (Delivered at Place) — the seller delivers to a named UK address, ready for unloading, while the buyer handles import clearance and duty.
• DPU (Delivered at Place Unloaded) — as DAP, but the seller also unloads. The only term where unloading is the seller's job.
• DDP (Delivered Duty Paid) — the maximum obligation. The seller clears the goods for import and pays the duty.

Matching the term to your operation

The right choice is commercial, not theoretical. Ask who is better placed to control the freight, who holds the customs authorisations, and who can recover the VAT.

DDP sounds appealing — one price, no surprises — but it can create real problems. If the overseas seller is the importer of record, your business may not be able to reclaim the import VAT, and postponed VAT accounting on your own returns generally will not be available. For a VAT-registered UK distributor buying goods for resale, DAP plus your own customs agent is often the cleaner route. Reverse the logic when you are the seller: DDP into a country where you have no tax registration or fiscal representative is usually a headache worth avoiding.

Consider insurance too. Under CIF and CIP the seller insures, but the standard required under CIF is the minimum cover, Clauses C, which excludes a long list of perils. If your goods are high value or fragile, arrange your own cover and negotiate the term accordingly.

Getting the small details right

Most disputes trace back to sloppy wording rather than the wrong term. A few habits prevent almost all of them.

• Always name the place precisely. "DAP UK" is meaningless; "DAP Unit 7, Brighouse Business Park, Incoterms 2020" is enforceable.
• State the edition, so there is no argument about which rules apply.
• Agree in advance who unloads, and whether a tail-lift or pallet truck is needed at the delivery point.
• Confirm who is the importer of record before the goods ship, not after they arrive.
• Remember that movements between Great Britain and Northern Ireland are not imports and exports in the international sense, so Incoterms are a poor fit. Use ordinary domestic delivery terms.

Set the term deliberately, write it down properly, and your freight, duty and insurance costs land where you intended — with no awkward conversation three weeks later.