Brexit and Incoterms: how three letters can make a big difference


The government's Brexit advice urges businesses trading with the EU to review their contracts for the supply of goods – particularly those based on Incoterms – to ensure that they remain appropriate in the event of "no deal". What are Incoterms, why do they matter and what changes should you make in the light of Brexit?

What are Incoterms and why do they matter?

Incoterms are standard provisions drawn up by the International Chamber of Commerce (ICC) for use in contracts relating to international trade in goods. They are not obligatory but they are widely used in practice.

Incoterms govern the following issues:

  • which party has the obligation to arrange transport (known as "carriage") and insurance of the goods;
  • which party will be responsible for the costs of transport, insurance and customs duties; and
  • at what point delivery is deemed to take place and risk (but not title) passes to the customer.
Key Incoterms

The following Incoterms can be used for any mode of transport. They are on a sliding scale, starting with the most supplier-favourable position (EXW) and ending with the most customer-favourable (DDP) and refer to Incoterms 2020, which is the most recent version:

  • EXW: Ex Works
  • FCA: Free Carrier
  • CPT: Carriage Paid To
  • CIP: Carriage and Insurance Paid to
  • DAP: Delivery at Place
  • DPU: Delivery at Place Unloaded*
  • DDP: Delivery Duty Paid

*DPU was formerly DAT (Delivery at Terminal) under Incoterms 2010

See below for Incoterms relevant to sea and inland waterway transport only.


How does Brexit make a difference?

Under current arrangements, a business which imports goods from the EU will not have to worry about paying customs duties because the UK is part of the EU Customs Union. But in a "no deal" Brexit scenario, tariffs are likely to be payable. Liability to pay tariffs normally rests with the customer, not the supplier. So unless the customer contracts to have goods supplied on DDP (Delivery Duty Paid) terms (or similar), it is likely to be responsible for paying any tariffs imposed by the UK authorities, as well as carrying out any relevant customs formalities so that the goods are cleared for import.

Brexit could also make a difference to obligations to arrange transport. For example, goods passing through the Channel ports or Channel tunnel may be subject to significant delays because of increased border checks. Whilst Incoterms do not stipulate the time for delivery, the party responsible for transport will usually be expected to deliver within a reasonable time – and Brexit may make any such contractual commitments difficult to meet. Transport costs could also increase, e.g. due to the need to pay HGV drivers more per trip because of longer journey times or the need to use different routes to avoid "pinch points" such as the Channel ports.

For suppliers, all these factors are likely to make it less desirable to be the party responsible for transport (even though this may have been an acceptable position in the past); they may therefore prefer to contract on EXW (Ex Works) terms, where the customer takes delivery at the supplier's premises and is responsible for transport, insurance and customs issues (including tariffs).

Shipping Incoterms

You may also come across other Incoterms such as the following – which are for use where the transport is by sea or inland waterway only (as opposed to where some other mode of transport is involved, such as road or rail – whether on its own or in addition to transport by ship):

  • FAS: Free Alongside Ship
  • FOB: Free On Board
  • CFR: Cost and Freight
  • CIF: Cost, Insurance and Freight

Again, these are arranged on a sliding scale with FAS being most favourable to the supplier and CIF being most favourable to the customer.


What changes should you make to your contracts?

For customers contracting on Incoterms, the most favourable position is DDP– whereas for suppliers, the most favourable position is EXW (although see the textbox below for some important points concerning VAT and customs if you are using these or other Incoterms). However, it is important not to approach Incoterms in isolation from the rest of the contract. Other contractual terms can make a significant difference to your exposure, such as provisions imposing specific timing requirements for delivery and those dealing with force majeure and liability. Equally, for supply contracts not based on Incoterms but which involve import from or export to the EU, check their provisions governing responsibility for transportation (and cost), risk and customs duties and assess the impact of a "no deal" Brexit on their fulfilment.

For more analysis of these issues, see our briefing "Brexit: the impact on contracts." Fuller definitions of individual Incoterms can be found on the ICC website.


If you are an exporter to the EU after the end of the Brexit transition period, make sure you obtain and retain suitable evidence that the goods have been exported – if such evidence is not obtained, or not forthcoming from third parties if outside your control, it is expected that UK VAT will need to be accounted for on the sale (whereas if you can prove that the goods have been exported, the supply should be zero-rated for UK VAT purposes).  Typically, such evidence will consist of the "Goods Departed Message" generated by the UK's customs IT system when goods leave the country, although authenticated copies of transport documentation may also be acceptable.  However, if you plan on using the EXW Incoterm, note that it does not require a buyer to provide you with such evidence, which would typically only be received by them – so you should ensure that the contract includes an obligation on the buyer to do so.  If you have the requisite bargaining power, you may also be able to demand that buyers pay a deposit equal to the amount of VAT you may be liable to pay if you cannot demonstrate that the goods were exported (the deposit would be refunded if the buyer provides the necessary evidence).

If you are an exporter to the EU and your customers are insisting that you continue to deliver on DDP terms after the end of the Brexit transition period, this is also potentially problematic.  For VAT purposes, it may be regarded as a supply in the customer's country – in which case it is expected that you will be required to register and account for VAT in that country.  To prevent this, where possible, you should try to agree to Incoterms which make the buyer responsible for import clearance and import VAT.  Conversely, if you import goods into the UK from the EU, you may be used to contracting on DDP terms (as this is relatively common and unproblematic for EU suppliers within the EU Single Market and the Customs Union) – but after the end of the transition period, your EU suppliers may be resistant to this if they do not want the compliance and administrative burden of registering and accounting for VAT in the UK (or indeed the additional cost and administrative burden of dealing with customs clearance on import into the UK).

NOTE: This article was updated in January 2020 to take account of changes in Incoterms 2020, the most recent version.


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