Be sure to review your terms of trade when making your Brexit preparations. Certain terms may expose you to unnecessary risks and costs before the details of a possible agreement and future legislation in the UK are fully known.It is clear that there will be definitive changes for trade post-Brexit, as the UK will be considered a third country. This means that trade between the EU and UK will now be regarded as import and export. Regardless of the type of agreement reached between the EU and UK following Brexit, a customs declaration will be required for goods traded between them. Such declarations will include details of the sometimes overlooked, yet still important, terms of delivery, or ‘Incoterms’ that have been agreed between the buyer and seller. The terms of delivery you decide to use will have a direct impact on your cost and risk exposure.
We find it highly likely that the capacity of freight forwarders and customs brokers will be challenged when the UK becomes a third country. We therefore urge you to consider where the liability lies when goods are not delivered on time with reference to agreements between buyer and seller. Are you willing to be liable for the customs processes between the EU and UK, bearing in mind that we don’t yet know what they will look like or how much time they will consume?
It is particularly important to reduce the risk in each transaction post-Brexit, and ensure that transactions which were previously intra-EU sales take place under the correct Incoterms in the commercial contract. For example, an EU buyer (importer) would be well advised to avoid purchasing goods ex works (EXW), as they will then be responsible for the UK export declaration. Similarly, an EU seller (exporter) should avoid selling DDP, as they will become responsible for the UK import declaration.
Failure to understand the correct definition of each Incoterm applied, and not discussing them in advance, will lead to problems in the supply chain and may cause conflict between sellers and buyers, for instance regarding who completes the customs declarations and makes the necessary duty payments. Furthermore, it could lead to disputes over payment for the goods, and which responsibilities lie with which party.
Being familiar with Incoterms is also necessary from a compliance perspective: you must understand what obligations you have under the terms, and act accordingly to avoid costly penalties or other legal consequences. For instance, as mentioned above, the Incoterms you use determine who is responsible for the customs declarations and what information is required.
Reviewing contracts to identify potential problems will be time well spent.
If you would like to discuss Incoterms in more detail, or have any general questions regarding Brexit, please contact our consulting team at firstname.lastname@example.org
The International Chamber of Commerce introduced Incoterms to provide a framework for traders to determine who is responsible for what. While it does not cover the ownership or title transfer of the goods, it does address:
• Duty and VAT payments
• The agreed point where risk and insurance responsibility is passed over from the seller to the buyer.
• Respective responsibilities for arranging necessary documentation and customs clearance
• Responsibility for arranging and paying for transportation
Category E: EXW (Ex Works)
Represents the minimum obligation to the seller (exporter). The seller makes the goods available at their premises, and hence the buyer will collect them at the point of origin.
1. Category F: FCA (Free Carrier) – FAS (Free Alongside Ship) – FOB (Free on Board)
The seller (exporter) arranges payment to deliver the goods to a carrier appointed by the buyer (importer). From that point on the buyer (importer) pays for all costs.
2. Category C: CPT ( Carriage Paid To) – CIP (Carriage and Insurance Paid To) – CFR (Cost and Freight) – CIF (Cost, Insurance and Freight)
The seller (exporter) has an obligation to arrange the contract for carriage to the country of import, following which the risk will pass to the buyer (importer).
3. Category D: DAT (Delivery at Terminal) – DAP (Delivery at Place) – DDP (Delivery Duty Paid)
The seller (exporter) bears all risks involved in bringing the goods to the agreed destination.
Secondly, Incoterms can also be divided in relation to the type/mode of transportation. For example FAS, FOB, CFR and CIF are only used for inland waterway and sea transport, whereas EXW, FCA, CPT, CIP, DAT DAP and DDP are used for all types of transport.