Incoterms 2020 – Ambitious and forward-thinking UK merchants know that e-commerce is now a globalised business. The ability to handle worldwide imports and offer international shipping are an expectation for customers. To make sure your business can import and export goods successfully from the UK you need to understand international commercial terms and conditions (International Commercial Terms). These are more commonly known as Incoterms.
In order to have a full graphic overview of the Incoterms, here you can download our Incoterms cheat sheet for free!
Incoterms are renewed every decade and 2020 brings new updates and changes. It’s important to ensure your business is using the right terms. Failure to do so can mean delays or failures in shipping. So whether you’re completely new to using Incoterms, or have been using them for years, this complete guide to Incoterms in 2020 will tell you everything you need to know:
- What are incoterms?
- When are incoterms used?
- How to use incoterms?
- Incoterms and Brexit?
- The function
- Incoterms 2019 vs Incoterms 2020?
- The 11 Incoterms explained
- The different Incoterms groups explained
- Which Incoterm should I use?
What are Incoterms?
Incoterms (International Commercial Terms) were developed in 1936 by the International Chamber of Commerce. Incoterms are a widely used system to define, simplify and clarify transactions between an exporter and an importer. Incoterms describe all tasks, risks, and costs associated with the transaction of goods worldwide. They clarify some of the most important trading conditions.
Incoterms help solve a common problem in international trade where parties from different countries may interpret transport agreements differently. They help both parties understand their responsibilities.
When are Incoterms used?
Incoterms act as a contract between the buyer and the seller. They help ensure both parties understand the most important contractual terms and obligations for global trade. This means they can honour their responsibilities and be clear of where others need to honour theirs. This include any responsibilities for the export, import, and transit of goods, such as:
- The transport contract.
- Transport insurance.
- The determination of the place of delivery.
- Transfer of risk.
- Information obligations.
Incoterms give information on the following questions:
- Who needs to pay the shipping costs?
- Who is responsible for the insurance costs?
- Who needs to pay the import costs?
- Which party is responsible for customs clearance?
- Who is in charge of the transport and where does this go?
- Who is liable for the goods and until when?
In a nutshell, Incoterms make sure both the sender and recipient understand their tasks and responsibilities during the entire shipping process. Since their inception in 1936, Incoterms have been updated seven times. To make sure they remain relevant, Incoterms are updated every 10 years. The most recent rules are Incoterms 2020.
How to use Incoterms?
It is the seller’s responsibility to determine which incoterm is used. For vendors who are sending goods from the UK to outside the EU, the Incoterms need to be clearly stated on your commercial invoice. This is also where you state your HS codes.
Top tip: Always include Incoterms in your company’s terms and conditions. This helps your customers understand their responsibilities for the shipping process, including costs with customs or insurance.
Adding your Incoterms to your T&Cs will also help protect you in the case of a failed delivery. Remember, not all customers will understand what each Incoterm means. Make sure that you describe the Incoterm(s) in clear and plain language. Explain each condition so your customers can understand what it means for them and what they need to do.
Make sure to keep in mind that carriers might not support all Incoterms, and this is important to know when you decide your Incoterms. Check with the carrier you plan to ship internationally which Incoterms they support before deciding.
Incoterms and Brexit
Shipping to Europe after Brexit now means that customs declarations and other international trading processes are included if you want to sell your products to customers in any of the EU Member States. You will need to use Incoterms to clarify the responsibilities for tax and other duties.
Lots of new changes have been introduced with Brexit, so make sure you’re also clued up on EU VAT, EORI numbers, and the rules of origin as well!
The function
As Incoterms play such an integral role in the international shipping process, it is vital that all UK e-commerce businesses understand how they work. Here are some of the main Incoterm functions.
The many purposes of Incoterms:
- They allocate the costs and answer who is responsible for which costs.
- They allocate the obligations. Incoterms determine who is responsible for which obligations on which route.
- They determine the transfer of risk, defining who covers which risk at which moment in time.
Other functions of the Incoterms:
- They define which contract partner buys the required goods documents.
- They also decide who is responsible for customs clearance.
- Certain Incoterms also determine who insures the goods and for which part of the shipping journey.
- They inform the other party member at what time and about what.
- Incoterms also instruct which contract partner carries out the goods inspection.
- Finally, they allocate who determines the type and packaging method.
One of the most important things for merchants to get to grips with is where the point of risk shifts from the seller to the buyer. This includes defining when the buyer is responsible for:
- the costs of transport.
- the risk of shipment.
- the insurance.
Incoterms 2019 vs Incoterms 2020?
As mentioned, Incoterms are updated every 10 years to keep pace with global developments. This guide refers to the newest iteration, Incoterms 2020. More and more companies are transferring to the newer terms already. While the 2010 Incoterms remain valid, it is important to operate using the most recent terms. This prevents confusion and helps ensure your shipments will reach their destination on time.
Here is a summary of the main changes in Incoterms 2020?
- DAT is now DPU: Delivered at Place Unloaded (known as Delivered at Terminal) includes goods being delivered at any point where it is possible to load goods. Delivered at Terminal only included a terminal or dock. Now, factories and warehouses are also covered with DPU.
- FCA now includes the on-board Bill of Lading (BL): A required Bill of Lading can now be specified in the sales agreement. The Bill of Lading indicates that goods have been loaded on board. Therefore, the buyer tells the carrier to hand over this “note of board” to the seller.
- CIF and CIP have different levels of insurance coverage: The seller must take out comprehensive transport insurance with CIP. But with CIF, only insurance with minimal coverage is required.
- FCA, DAP, DPU, and DPP now have their own means of transport: It is possible to arrange the transport of goods with their own means of transport.
The 11 Incoterms explained
1: EXW – Ex Works
Access to goods must be given to the buyer from the seller at a determined location. After that, all costs and risks are then the responsibility of the buyer for the entire shipping process.
2: FCA – Free Carrier
The goods must be made available at the seller’s own risk and expense at their own premise or a predetermined place. The seller then bears responsibility for the clearance of the goods for export. However, it can be agreed that the buyer must instruct the carrier to transfer a “Bill of Lading (BL)” with a note on board to the seller.
3: CPT – Carriage Paid To
For the seller, CPT has the same responsibilities as FCA, but they must also pay the delivery costs.
4: CIP – Carriage Insurance Paid To
The seller has the same obligations as CPT, but the seller is also obliged to pay the insurance with a high coverage ratio. Parties can agree separately to apply limited coverage.
5: DAP – Delivered At Place
The costs and risks are the seller’s responsibility during the transport of the goods to the predetermined address. Once the goods arrive at this address and they are ready for unloading, the risk then passes to the buyer.
6: DPU – Delivered at Place Unloaded
The costs and risks of delivering goods to an agreed destination where the goods can be unloaded for further transport are the responsibility of the seller. The seller also arranges customs and unloads the goods at the agreed place. Then the buyer arranges the customs clearance and any associated rights.
7: DDP – Delivered Duty Paid
The seller must pay the costs and is responsible for the risks of transport. They also carry out the export and import responsibilities and pay any import duties. The risk then passes to the buyer as soon as the goods have arrived at the address and are ready for unloading.
8: FAS – Free Alongside Ship
The seller is responsible for all costs and risks up until the point the goods are delivered next to the ship. The risk then transfers to the buyer from that point, and the buyer must also arrange the export clearance and import clearance.
9: FOB – Free On Board
The seller bears all costs and risks until the goods are on board the ship and also arranges the export clearance. As soon as the goods have been delivered to the ship, the buyer bears all responsibilities.
10: CFR – Cost And Freight
CFR is the same for the seller and buyer as FOB. However, the seller needs to also pay for the transport of the goods to the port.
11: CIF – Cost, Insurance, and Freight
The seller has the same obligations as with CFR but also pays the (minimum) insurance costs. The buyer must pay for more comprehensive insurance.
Here is an overview of the obligations for both the buyer and seller.
This table clearly shows which party has the responsibilities and obligations for different tasks in the shipping process. For example, insurance, transportation and export duties.
The different Incoterms Groups explained
Incoterms are divided into four groups. This helps clarify the processes and responsibilities for both vendor and customer.
- Group E: EXW is the only “collection” Incoterm. This means the buyer is responsible for almost almost all costs and risks during the entire shipping process.
- Group F: In this group, the seller doesn’t cover the costs and risks of the transport in the Incoterms FCA, FAS, and FOB (all the terms beginning with F). The costs and the risk of the main transport are transferred to the buyer as soon as the goods are passed to the carrier.
- Group C: CPT, CIP, CFR, and CIF are the Incoterms where the seller is responsible for all the main transport costs. Once the goods are passed to the carrier, the risk of transportation is the only thing transferred to the buyer. The seller is still responsible for the costs and any insurance.
- Group D: The seller is responsible for all costs and risks until the arrival of the goods to the predetermined destination with DAP, DPU, and DPP.
Which ones should I use?
If you are an online merchant that sells internationally, Incoterms (Delivered At Place) is the most commonly used Incoterm. If you are a B2C vendor sending a package overseas but are unsure on the right Incoterm to use, DAP is a good choice.
DAP states that it is your responsibility to pay shipping costs, prepare export documentation and deal with any insurance required. The responsibility for import and customs costs lies with the recipient.
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Need help shipping to a particular country?
Check out the following guides for more specific advice on shipping to a particular nation:
- Shipping from UK to US
