Why are incoterms important for a no-deal Brexit?

Incoterms are a great way of making clear who is responsible for the shipment, insurance and risk along the way. As an example, if you are a UK organisation buying car parts from a vehicle manufacturer based in Stuttgart, Germany, tariffs could have a profound impact on your business. Under a no deal Brexit, tariffs might be introduced – such as export duties by the EU or perhaps by import duties from the UK. It’s important to clearly state who should bear the risk, the German vehicle manufacturer or the UK buyer of car parts. If the seller bears this risk, they will most certainly see a price increase. If the buyer takes on this risk, they’ll also be taking on unknown risk.

Some contracts will already make detailed provisions for who bears the responsibility of the goods at specific stages of transporting, and who incurs the costs of delays or duties. Incoterms such as EXW (Ex Works), FCA (Free Carrier), CIF (Cost, Insurance and Freight), FOB (Free on Board), DAP (Delivery at Place), DDP (Delivery Duty Paid) are very detailed in terms of how the risk is spread between the importer and the exporter.

But in terms of a no deal Brexit, as an example, if you are a UK buyer of food products from an Italian supplier, and your contract states the 2010 Incoterms are FCA (Free Carrier), what does this mean?

Scenario: Pre March 29^th 2019

The Italian food supplier holds the risk of any EU export tariffs and the buyer bears the costs of UK import duties

Scenario: Post March 29^th 2019

Because UK import duties for European goods would now be the same as import duties for worldwide goods (which wasn’t the case when the UK was part of the EU), so there may well be additional import duties, and more pre-export customs documentation to report to HM Treasury.

Contracts and Incoterms

Many pan-EU contracts will not include incoterms in their contracts, so when the UK-EU customs responsibilities change, there might be some confusion on who is responsible for what if the contract does not specify incoterms.

It’s important to keep an eye out for technical notes from HM Treasury on customs and excise procedures, and luckily, you can opt in to their email alerts bulletins here.

For UK businesses trading with the UK, if there’s a no deal scenario for Brexit, bear in mind the following:

1. Customs and excise rules for UK-EU will no longer apply – businesses should treat the movement of goods and services between the UK and the EU as though they are moving between the outside of the EU and the UK. This means changing processes, internal reporting, external reporting and any necessary import declarations (which are often not needed as frequently for UK-EU trade).
2. Customs declarations will apply – in the same way that the UK charges customs declarations for goods it receives outside of the EU, from the 29^th March, these will also be extended to apply to the EU. It’s important to bear that in mind, especially if your business just deals with UK-EU trade, and is not familiar with dealing with goods from outside of the EU.
3. The Excise Movement Control System will be no longer be available to use – this means that any suspended movements between the UK and the EU will not be controlled by EMCS.

Other key considerations that will likely change, or that businesses will need to be aware of:

• Import and export duties
• Cross border logistics costs
• VAT systems
• Low value consignment tax
• Warehouse storage
• Haulage delays

The UK Government’s ‘Department for Exiting the European Union’ has recently updated its list of technical notices on how to prepare if the UK leaves the EU with no deal. More can be found here, and we highly recommend you do some (not so light) reading to see how it might affect your business. If you fancy some lighter reading, we’ve also put together a series of short (we promise) infographics on some of the key implications a no deal Brexit could have on businesses, read more here.

Download the full PDF infographic here