International Commercial Contracts - Incoterms
This guide explains the basic principles of International Commercial Terms (Incoterms), and how traders can use them in buyer or seller contracts to make clear who is responsible for the goods at each point of the transport process. The guide also explains the benefits of using Incoterms and what each Incoterm means for the buyer and seller, as well as offering sources of further help and advice for traders.
The latest set of Incoterms, known as Incoterms 2020, came into force on 1 January 2020.
This guide explains what Incoterms are, Incoterms and contracts and Incoterms and VAT.
What are Incoterms?
Incoterms are maintained and developed by the International Chambers of Commerce (ICC).
What are Incoterms?
International Commerce Terms (Incoterms) are an internationally recognised standard trade terms that set out buyer and seller responsibilities.
Each Incoterm establishes who is responsible for costs and risks such as:
- transport costs
- insurance
- duties payable
- customs clearance
Incoterms are accepted by governments, legal authorities and businesses worldwide for the interpretation of most commonly used terms in international trade. This reduces or removes uncertainties and often costly misunderstandings arising from different interpretation of such terms in different countries. Incoterms apply to both domestic and international sale contracts. Read more about Incoterms and contracts.
When should Incoterms be used?
Before you use Incoterms, consider the country of the buyer. Some countries stipulate that set Incoterms are used, while others set chosen Incoterms as standard practice. Transport may also affect your choice as some Incoterms can only be used for transport by sea and inland waterways.
The latest set of Incoterms, known as Incoterms 2020, came into force on 1 January 2020.
Incoterms and contracts
The International Chamber of Commerce (ICC) originally published the very first set of Incoterms in 1936. Since that first publication, they have been updated in 1953, 1967, 1980, 1990, 2000, 2010 and most recently in 2020. Incoterms 2020 came into force on in force 1 January 2020.
Why are Incoterms used in contracts?
Because Incoterms are standard definitions, they are used in contracts to reduce confusion and avoid traders having difficulty understanding the import requirements and shipping practice used in other countries.
Using the correct Incoterms clarifies the contracts you have with your suppliers or customers. 'Incoterms' is a protected ICC trade mark and only the original texts of Incoterms are to be considered as authoritative for incorporation into contracts. You should use the current version, Incoterms 2020, and note this in the contract. These terms should also be used on any paperwork linked to the contract, such as invoices or statements. Failing to state that you are using Incoterms 2020 could result in a dispute.
Most contracts from 1 January 2010 will refer to Incoterms 2010, unless the seller and the buyer agree to use an earlier version. Contracts dated before 1 January 2010 are still binding under Incoterms 2000. As of January 2020, the ICC recommends Incoterms 2020 are used.
The sales contract between the buyer and seller should also state which country's legal system will be used in case of a dispute. If both parties' countries are signed up to the UN Convention, this will provide the legal framework for settling the dispute. Incoterms will provide the legal backbone to settling the dispute.
Incoterms and VAT
VAT is not covered as part of the 'costs' under any Incoterm, but it is payable on many international trade transactions. Summaries of when you have to pay import VAT and export VAT are given below. If you wish to agree that the buyer or seller is responsible for paying VAT, it should be written as an addition into the sales contract as it will not be covered by the Incoterm.
Paying import VAT
Generally, you must pay VAT on imported goods at the same rate that the goods attract if they were supplied in the UK. The procedure for making payment depends mostly on whether the country from which you are importing goods is inside or outside the European Union (EU). You can reclaim VAT from goods imported from within the EU when you declare them on your VAT return.
Find out more about tax, VAT and excise duty when trading internationally.
Paying export VAT
When you export goods outside the EU you can usually zero-rate the goods for VAT. To qualify, the goods must leave the EU within a set time limit and you must keep records of the sale and transport of the goods. Separate rules apply to goods that are moved through EU countries to other EU countries. Goods exported to a customer outside the EU can also be zero-rated for VAT even if they initially travel through other EU countries.
Find out more about importing goods and services and VAT.
Incoterms 2020
Launched by the International Chamber of Commerce (ICC) as the first revision to the system in a decade, Incoterms 2020 came into force on 1 January 2020.
Incoterms continue to enable traders to make clear who is responsible for the goods at each point of the transport process in buyer or seller contracts.
Incoterms 2020 is similar to the previous one, Incoterms 2010, but it takes into account developments in commercial practice, and updates the rules to make them easier to use.
What are the 11 Incoterms?
There are 11 incoterms in Incoterms 2020. These are:
Any mode of transport:
- EXW - ExWorks
- FCA - Free Carrier
- CPT - Carriage Paid To
- CIP - Carriage and Insurance Paid To
- DPU - Delivered at Place Unloaded
- DAP - Delivered at Place
- DPU - Delivered Duty Paid
Sea and inland waterway transport (only):
- FAS - Free Alongside Ship
- FOB - Free on Board
- CFR - Cost and Freight
- CIF - Cost, Insurance and Freight