Managing Incoterms in a post-Brexit environment
Updated: May 18, 2021
International Commercial Terms, more commonly referred to as Incoterms, are the rules which govern international trading and are the framework for determining who must perform the admin, settle any costs, and sign paperwork for goods that are bought and sold between countries. For businesses based in the United Kingdom, selling their goods into the EU, the impact of negotiating the most beneficial Incoterms had not been the priority, that is until Brexit and the end of the transition period on 31st December 2020. From 1st January 2021, understanding and negotiating the correct Incoterms between buyer and seller became part of the consideration when trying to navigate a post-Brexit world for businesses selling their goods into the EU.
There are currently 11 Incoterms in use, but for most businesses there are three in particular that are the most common. These being, DDP, DAP and EXW. These three letter denominations stand for Delivered Duty Paid, Delivered At Place and Ex Works respectively and define the who and when associated with the costs and admin of moving goods.
In the first instance, DDP, means that the seller is responsible for all paperwork, associated duties and taxes and clearing customs when goods arrive in another country. Essentially all risk and obligation remain with the seller and it is their responsibility to ensure that goods make their way to their customer as seamlessly as possible, in the eyes of the customer.
Under a transaction where the Incoterms are stated as DAP, the buyer becomes the one responsible for paying the taxes and duties and clearing customs when the goods and in the country of receipt. Although the seller is responsible for ensuring that all the compliance requirements are met when the goods leave the country where the goods are sold from, it is the buyer’s responsibility on the other side.
In a situation where the Incoterms have been negotiated as Ex Works, basically all responsibility rests with the buyer, who has to ensure both the export out of the seller’s country and import into the buyer’s country is compliant, the taxes and duties are paid for and all the correct paperwork is completed at both side of customs clearance.
In theory it shouldn’t be problematic to come to an arrangement whereby the buyer and seller of goods are able to agree on who should take responsibility, and before Brexit it was much simpler. Prior to Brexit, as the UK was part of the Customs Union and Single Market, goods could freely move around the EU with no customs clearance requirements, no Import VAT payment to consider and no Duties or Tariffs needing to be paid. As a result of Brexit, the buyer and seller are now in different customs areas and all of these issues add a layer of bureaucracy, cost and potential time delays to any transaction where goods cross borders. Businesses need to carefully consider what their priorities are when entering into contracts with new customers and potentially more importantly, renegotiating older contracts with existing customers. Issues of cashflow, increased compliance costs, dedicated customs and admin staff are all things which UK businesses now have to think about when trading into the EU. Will customers now be prepared to take on the additional risk and suffer a cash outlay at the border, in order to continue buying goods from the UK? Do UK businesses have the margins to absorb the increased costs and Import VAT liability so that their customers don’t see any change in their trading relationship and can UK businesses afford to lose customers who refuse to renegotiate the Incoterms – where is the balance for UK companies, now that these new considerations need to be thought of? And finally, perhaps most importantly, are businesses prepared to have their goods held up at the border because either freight forwarders or customs officials are unsure of who the responsible party is, thus causing unnecessary delays?
Ultimately, UK businesses need to make sure they understand these terms and are aware of the changes due to Brexit when trading into the EU. Not doing so could lead to complications which in this current Covid-19 environment, only add to the problems companies are having to grapple with at present.
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About the author: Marc Sevitz is Commercial Operations Manager at re:TRADE, powered by VAT IT - for any queries relating to post-Brexit trade, your supply chain or how to reclaim Import VAT, you can book a free re:TRADE Consultation.