Incoterms explained for UK businesses

If your business imports or exports goods, you will probably come across terms such as EXW, FCA, DAP, DDP or CIF. At first glance, they can look like little more than abbreviations on a commercial invoice.

In reality, they can determine some of the most important parts of an international shipment, including who arranges the transport, who pays particular costs, where risk passes from the seller to the buyer and who is responsible for customs formalities.

These terms are known as Incoterms® rules. They are published by the International Chamber of Commerce and are used internationally to help buyers and sellers agree responsibilities when goods are sold and transported. The current edition is Incoterms® 2020, which contains 11 different rules.

For UK businesses, understanding them matters because choosing the wrong term, or agreeing one without understanding what it means, can lead to unexpected freight costs, customs problems or disputes over who was responsible when something went wrong. This guide explains the main Incoterms in plain terms and looks at what they mean in practice when your goods are moving from one business to another.

What are Incoterms?

Incoterms is short for International Commercial Terms. They are a set of globally recognised rules designed to clarify the responsibilities of buyers and sellers when goods are delivered. Rather than writing out every transport responsibility from scratch in each sales agreement, businesses can agree an Incoterm that establishes a recognised framework for the shipment.

Among other things, Incoterms can help establish:

• where the seller's delivery obligation is completed
• which party arranges the main transport
• who pays particular transport costs
• where the risk of loss or damage transfers from seller to buyer
• who handles export and import customs formalities
• whether the seller has an obligation to arrange cargo insurance

They can be used in international and domestic contracts, although they are particularly important in cross-border trade. HMRC describes them as globally recognised standards that help avoid misunderstandings by clarifying the tasks, costs and risks involved in delivering goods from a seller to a buyer.

They do not replace the entire sales contract. Instead, they deal specifically with particular responsibilities associated with the delivery of goods.

Why do Incoterms matter?

Imagine a UK company buying machinery from a supplier overseas. The supplier gives a price and says the goods will be delivered under EXW terms. The buyer assumes that means the supplier will arrange the shipment to the UK. It does not.

Under EXW, the seller's responsibility can end when the goods are made available at its premises or another agreed place. The buyer may then have to arrange collection, transport and relevant export and import processes.

Now imagine the same transaction being agreed under DDP. The division of responsibilities changes substantially, with the seller taking on far more responsibility for getting the goods to the agreed destination and handling import clearance.

The product has not changed. The countries have not changed. But the commercial responsibility for the shipment can be completely different. That is why agreeing an Incoterm without understanding it can create expensive surprises.

What do Incoterms not cover?

Incoterms are important, but they do not decide everything connected with a sale. For example, they do not by themselves determine:

• the price of the goods
• when the buyer must pay
• who legally owns the goods at each point
• what happens if one party breaches the contract
• product warranties
• governing law and dispute resolution
• whether particular goods can legally be imported or exported

Those issues need to be dealt with elsewhere in the contract and through the relevant legal and customs requirements.

This distinction is important because transfer of risk is not necessarily the same thing as transfer of ownership. An Incoterm can tell you when the risk of physical loss or damage moves from one party to another without deciding who legally owns the goods at that moment.

What are the 11 Incoterms?

Incoterms® 2020 contains 11 terms. Seven can be used for any mode of transport:

• EXW (Ex Works)
• FCA (Free Carrier)
• CPT (Carriage Paid To)
• CIP (Carriage and Insurance Paid To)
• DAP (Delivered at Place)
• DPU (Delivered at Place Unloaded)
• DDP (Delivered Duty Paid)

Four are specifically intended for sea and inland waterway transport:

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

That distinction matters. Terms such as FOB and CIF are often used very casually in business conversation, but under Incoterms® 2020 they are specifically intended for sea or inland waterway movements. For goods moving by road, air, rail, courier or containerised multimodal transport, one of the seven rules for any mode may be more appropriate.

EXW: Ex Works

EXW places relatively little responsibility on the seller. Under Ex Works, the seller makes the goods available to the buyer at the seller's premises or another named place. The seller does not normally have to load the goods onto the collecting vehicle or clear them for export. In simple terms, the seller is effectively saying: "The goods are ready here. From this agreed point, the transport is your responsibility."

This can give the buyer significant control over the transport arrangement, but it also creates additional responsibility. The buyer may need to arrange:

• collection and main carriage
• export procedures
• onward transport and import clearance
• duties and taxes
• delivery to the final destination

For a UK company buying from overseas, that can be a substantial amount of administration. EXW may therefore look simple at the quotation stage while creating more work once the shipment needs to move.

FCA: Free Carrier

FCA is another commonly used Incoterm and can be used for any mode of transport. Under FCA, the seller delivers the goods to the carrier or another party nominated by the buyer at an agreed place. The exact location matters because risk transfers at that delivery point. That might mean delivery at the seller's premises, a warehouse, a freight terminal or another specifically agreed location.

FCA can be particularly useful because it creates a clearer handover between the seller and the buyer's chosen transport arrangement. For example, a UK buyer may appoint a freight forwarder overseas. The seller delivers the goods to that nominated carrier in accordance with the agreed FCA location. From there, the buyer's transport arrangements continue.

As with all Incoterms, simply writing FCA is not enough. The named place should be recorded clearly so both parties understand exactly where responsibility changes.

CPT: Carriage Paid To

CPT stands for Carriage Paid To. Under CPT, the seller arranges and pays for carriage to the named destination. This can sound as though the seller remains responsible for the goods all the way to that destination. That is not necessarily the case.

Under CPT, risk transfers when the goods are delivered to the carrier or another person nominated by the seller at the agreed point, even though the seller is paying the transport cost to the named destination. This is an important example of why cost and risk are not always transferred at the same location under Incoterms. The seller might be paying the freight much further along the journey while the buyer is already carrying the risk. That distinction should be understood before the sales contract is agreed.

CIP: Carriage and Insurance Paid To

CIP operates similarly to CPT, but it adds an insurance requirement. The seller arranges and pays for the transport to the named destination and also arranges insurance covering the buyer's risk during the carriage. The risk itself still transfers according to the Incoterm's delivery point rather than simply remaining with the seller until the final destination.

Businesses should also pay attention to the level of insurance being provided rather than assuming the existence of insurance means every possible loss is fully covered. If a consignment is particularly valuable, fragile or commercially critical, the parties should confirm the cover meets their requirements.

DAP incoterms: Delivered at Place

DAP stands for Delivered at Place. Under DAP, the seller takes responsibility for bringing the goods to the named destination and placing them at the buyer's disposal on the arriving vehicle, ready for unloading. The seller bears the risks associated with bringing the goods to that point. The buyer is generally responsible for unloading and import clearance.

For example, a seller in Europe might agree: DAP, buyer's warehouse, Birmingham, United Kingdom, Incoterms® 2020. The seller would arrange transport to that location, but the buyer would normally handle the relevant import formalities.

DAP can therefore work well where the seller is comfortable organising transport to the customer's premises but does not want to take responsibility for importing the goods into the destination country.

DPU: Delivered at Place Unloaded

DPU means Delivered at Place Unloaded. It replaced the older DAT (Delivered at Terminal) rule when Incoterms® 2020 was introduced. The key feature of DPU is contained in the name: the seller is responsible for unloading the goods at the agreed destination.

That distinguishes it from DAP. Under DAP, the goods are delivered ready for unloading. Under DPU, the seller's responsibility extends through the unloading process. That difference may be significant where unloading requires equipment, labour or particular access arrangements. If DPU is being agreed, both sides should make sure the chosen delivery location is somewhere the seller can arrange unloading safely and practically.

DDP incoterms: Delivered Duty Paid

DDP places a very high level of responsibility on the seller. Under Delivered Duty Paid, the seller is responsible for getting the goods to the named destination, clearing them for import and dealing with the relevant customs formalities and duties. The goods are made available to the buyer at the destination ready for unloading.

For the buyer, that can make the purchasing process appear relatively simple because much of the transport and customs responsibility sits with the seller. For the seller, however, DDP can create substantial obligations.

A UK exporter agreeing DDP to an overseas customer should therefore make sure it understands whether it can legally and practically fulfil the import requirements in the destination country. Likewise, a foreign seller offering DDP into the UK needs to be capable of satisfying the relevant UK import requirements. DDP should not simply be selected because it sounds like the most convenient option.

FAS: Free Alongside Ship

FAS is one of the four Incoterms designed specifically for sea and inland waterway transport. Under Free Alongside Ship, the seller delivers the goods when they are placed alongside the nominated vessel at the named port of shipment. The risk then transfers to the buyer.

This might mean the goods are placed on a quay or barge alongside the vessel. From that point, the buyer is responsible for the relevant onward costs and risks. FAS is therefore quite specialised and is much less likely to be relevant to an ordinary UK business sending a pallet by road or courier.

FOB: Free On Board

FOB stands for Free On Board and is another sea and inland waterway rule. Under FOB, the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risk passes when the goods are on board the vessel.

FOB has been used in international trade for many years and is probably one of the best-known Incoterm abbreviations. However, that familiarity can also cause misuse. Businesses sometimes refer to almost any international shipment as "FOB", even where the goods are travelling by another mode or as part of containerised multimodal transport. The correct Incoterm should reflect the real transport arrangement rather than simply using terminology because it is familiar.

CFR: Cost and Freight

CFR means Cost and Freight. It is also intended specifically for sea and inland waterway transport. Under CFR, the seller places the goods on board the vessel and pays the freight required to bring them to the named port of destination. However, the risk transfers when the goods are on board the vessel at the port of shipment.

Again, this demonstrates the difference between who pays and who carries the risk. The seller may still be paying for a substantial part of the journey after the risk has already moved to the buyer.

CIF: Cost, Insurance and Freight

CIF means Cost, Insurance and Freight. It operates similarly to CFR but requires the seller to arrange insurance against the buyer's risk during the carriage. It is specifically intended for sea and inland waterway transport. The seller pays the freight to the named port of destination and arranges the required insurance, but risk passes when the goods are on board the vessel.

For buyers, it is important to understand that the presence of seller-arranged insurance does not automatically mean the policy provides unlimited protection. If the goods are particularly valuable, the level and scope of cover should be checked.

Which Incoterm should a UK business choose?

There is no single "best" Incoterm. The right choice depends on the transaction. A business should consider questions such as:

• who has the strongest transport network and can obtain the best freight rates?
• who understands the export procedures?
• who can legally handle the import formalities?
• which party wants control over the carrier?
• where should risk transfer?
• does the shipment need insurance?
• can the agreed party fulfil the obligations in the destination country?

A small UK importer buying from an established overseas supplier may want a very different arrangement from a British manufacturer exporting goods through its own freight network. The commercial value of the shipment also matters. Taking more control over transport may be worthwhile for high-value or time-sensitive consignments, while another company may prefer the seller to manage the movement as far as possible. The key is to choose deliberately rather than treating the Incoterm as an administrative detail.

Always include the named place

One of the most important practical points when using Incoterms is to specify the location properly. Writing DAP UK is far less useful than DAP [specific delivery address], Manchester, United Kingdom, Incoterms® 2020. Likewise, FCA warehouse is less precise than identifying the exact warehouse or collection point.

The location can determine exactly where delivery takes place and where risk moves from seller to buyer. The International Chamber of Commerce recommends using the chosen Incoterm together with the named place or port and the relevant edition of the rules. For current contracts, businesses would normally reference Incoterms® 2020.

Incoterms and customs are connected, but they are not the same thing

An Incoterm can allocate responsibility for completing particular customs formalities between the buyer and seller. It does not remove the underlying customs obligations. A UK business may still need to consider:

• EORI registration and customs declarations
• commodity codes and rules of origin
• import duty and VAT
• licences and prohibited or restricted goods
• supporting documentation

The exact requirements depend on what is being moved and where it is travelling. For example, government guidance notes that businesses involved in importing and exporting may need an EORI number and appropriate customs documentation, while some goods are subject to specific prohibitions or restrictions.

The Incoterm helps decide who is responsible for doing something. Customs law determines what has to be done. Those are two different questions.

Incoterms can affect your transport quote

The agreed Incoterm can also affect the type of transport quote your business needs. If you are buying under EXW terms, for example, you may need a transport provider to collect the goods from the seller and manage a much larger part of the journey. If you are buying under DAP, much of the transport to your premises may already be the seller's responsibility.

Similarly, a UK exporter selling FCA may only need to arrange movement to the agreed handover point, while selling DAP could mean arranging the delivery all the way to the buyer's premises overseas. When asking for a freight or courier quotation, telling the transport provider the Incoterm and named delivery point can therefore provide important context.

What information does your carrier need?

The carrier or courier does not decide the commercial agreement between the buyer and seller. However, the transport provider may need enough information to understand its role within the shipment. Depending on the movement, useful information can include:

• collection and delivery addresses
• the agreed Incoterm and invoice details
• a description of the goods, with the commodity code where required
• quantity, package count and gross and net weight
• country of origin and EORI details where relevant
• customs documentation and any restrictions on the goods

Government guidance on commercial invoices for international movements includes details such as exporter information, consignee or delivery address, Incoterms, currency, goods descriptions, quantity, value, country of origin and package weights. Missing or incorrect paperwork can delay a consignment even when the physical transport itself is simple.

Who is responsible if something goes wrong in transit?

This is one of the reasons the Incoterm matters. Each term establishes a point at which the risk of loss or damage passes from the seller to the buyer. That point is not necessarily the destination.

Under CPT or CIP, for example, the seller may pay for carriage to the named destination while risk transfers earlier when the goods are handed to the carrier. Under DAP, the seller retains the risk until the goods reach the named destination ready for unloading.

Understanding that point can be important if goods are damaged or lost during transport. It also reinforces why businesses should not rely on the Incoterm alone when thinking about insurance. Your contractual risk, cargo insurance and the carrier's liability can all be separate issues.

Incoterms and dedicated courier transport

Not every movement involving Incoterms needs container shipping or a traditional freight forwarder. Goods can also cross borders using dedicated road transport, particularly for urgent, valuable or time-sensitive consignments.

For example, a manufacturer may need a component transported urgently between the UK and a European customer or supplier. The sales contract may establish which party is responsible for arranging transport, while the movement itself is carried out using a dedicated vehicle.

The Incoterm determines the commercial responsibilities between buyer and seller. The transport operator then carries out the physical journey according to the agreed collection, delivery and customs requirements. Keeping those roles separate makes international transport much easier to understand.

The most important thing is clarity

Incoterms exist to remove uncertainty. They work best when both parties understand the term they have chosen. Before agreeing one, make sure you know:

• who arranges collection and who pays for the main transport
• where risk transfers
• who arranges insurance where applicable
• who handles export and import customs formalities
• who pays relevant duties and taxes
• who is responsible for unloading
• the exact named location associated with the Incoterm

If any of those points remain unclear, resolve them before the goods are dispatched. A three-letter abbreviation can allocate a considerable amount of commercial responsibility. It is worth knowing exactly what those three letters mean.