If you have ever stared at a supplier's quote and wondered what on earth "FOB Shanghai" or "EXW works" actually means for your wallet, you are not alone. Incoterms are one of those bits of trade jargon that everyone throws around and almost nobody explains properly.
Here is the good news. You do not need to memorise all eleven of them, and you certainly do not need a law degree. In practice, every Incoterm is answering just two questions. Who pays for what along the journey? And who is on the hook if the goods are lost or damaged along the way? Get those two straight and the three-letter codes stop being scary.
This guide keeps things plain and focuses on the handful of terms UK importers and exporters actually meet, plus a warning about the one that most often catches small businesses out.
So what actually is an Incoterm?
Incoterms are standard three-letter trade terms published by the International Chamber of Commerce (ICC). They are a shared shorthand that a buyer in Bradford and a seller in Shenzhen can both understand the same way, so nobody argues later about who was supposed to book the shipping or pay the duty.
The current set is Incoterms 2020, and there are eleven terms in all. Each one draws a line at a specific point in the journey. On one side of that line the seller is responsible; on the other side, you are. The line covers two separate things that people often muddle together: the cost (who pays for transport, insurance, clearance and so on) and the risk (who bears the loss if a pallet gets crushed or a container goes overboard). Sometimes those two lines sit in the same place, and sometimes they do not, which is exactly why it pays to read the term rather than assume.
One more thing worth knowing up front. Some terms can be used for any mode of transport, while a few are meant only for sea and inland waterway shipments. We will flag that where it matters, because using a sea-only term for an air or road shipment is a classic own goal.
The five terms UK SMEs actually meet
You will bump into most of these across air, sea and road freight. Here they are in plain English, roughly in order of how much the seller does for you.
EXW (Ex Works) is the bare minimum from the seller. They simply make the goods available at their own premises, and everything after that is on you: collecting from their door, export clearance in their country, the main transport, and then UK import duties and VAT. It sounds cheap because the headline price is low, but EXW can quietly saddle a UK importer with far more responsibility than they bargained for, including arranging export paperwork in a country whose rules you do not know. For most small importers it is more hassle than it is worth.
FOB (Free On Board) is the common default for buyers sourcing from Asia, and for good reason. The factory handles its side up to the point the goods are loaded at the origin port, including export clearance, and you take over from there. It gives a clean, predictable handover and lets you (or your freight forwarder) control the main leg and the costs. Note that FOB is a sea and inland waterway term; if you are shipping by air, a term like FCA is the equivalent clean handover.
CIF (Cost, Insurance and Freight) is like FOB, but the seller also arranges the main sea freight and takes out insurance for the voyage. It can feel convenient, but you are trusting the seller to book sensible freight and adequate cover, and you often lose visibility and control. Like FOB, CIF is meant for sea and inland waterway shipments only.
DAP (Delivered At Place) means the seller delivers the goods all the way to your agreed UK address, but the import side is still yours. You handle UK customs clearance and pay the import duty and VAT. In practice this is a popular, sensible middle ground for a lot of UK importers.
DDP (Delivered Duty Paid) goes one step further: on paper the seller covers everything, right down to UK import clearance, duty and VAT, and drops the goods at your door with nothing left to pay. It is the most seller-heavy term of the lot, and it comes with a catch worth its own section below.
The DDP trap, and why it bites small businesses
DDP looks like the dream: you agree one price and the goods just turn up, all duties settled. In reality it is the term that most often goes wrong for UK shippers, and it is worth understanding why before you accept it.
The problem is who acts as the importer of record. To clear goods into the UK and settle import VAT and duty, someone needs to be registered here and take on that legal role. Since Brexit, it is often awkward or simply impractical for an overseas seller to do that. Many do not have a UK VAT registration or the standing to reclaim or account for import VAT properly. So a shipment sold as DDP can stall at the border while everyone works out who is meant to file the declaration and pay the charges.
When that happens, the goods sit, the carrier chases someone for money, and the arrangement quietly falls apart, sometimes with you being asked to pay the very charges you thought were already covered. If a supplier offers you DDP, it is fair to ask a blunt question: who exactly will act as importer of record in the UK, and are they set up to reclaim or account for the import VAT? If the answer is vague, you are usually better off on DAP and handling the clearance yourself (or letting your forwarder do it), so you stay in control.
EXW carries a milder version of the same issue in reverse: you can end up responsible for export formalities in the seller's country, which is rarely something a UK SME wants to take on.
A quick word on the term that got a new name
If you have seen older paperwork, you might spot DAT (Delivered At Terminal) floating about. Incoterms 2020 renamed that to DPU, which stands for Delivered at Place Unloaded. It is the only term where the seller is responsible for unloading the goods at the destination, and "place" can now be anywhere agreed, not just a terminal.
Incoterms 2020 also tidied up a practical detail: several of the delivered terms now clearly allow for a buyer or seller using their own transport, rather than assuming a third-party carrier is always involved. Handy if you or your supplier run your own vehicles for part of the journey.
You are unlikely to meet DPU often as a smaller shipper, but it is worth recognising so an old DAT reference on a document does not throw you.
How to actually choose
Forget trying to rank the terms from best to worst, because there is no universal winner. The right Incoterm depends on how much of the journey you want to control and how comfortable you are handling paperwork at either end.
As a rough rule of thumb for UK importers: FOB (or FCA for air) gives you a clean handover and control of the main leg, which suits most people. DAP is a good shout if you would rather the goods came to your door but you are happy to handle UK clearance. Be cautious with EXW unless you genuinely want to manage export formalities abroad, and treat DDP with healthy suspicion unless the seller can prove they can act as UK importer of record.
Whatever you choose, always pair the three-letter term with a named place, so "FOB Ningbo" or "DAP your Bradford warehouse", never just the code on its own. And if in doubt, ask before you sign. A quick conversation with a freight forwarder who knows UK clearance can save you a stalled container and a surprise bill. That is exactly the sort of thing we help importers and exporters sort out every day, so if a supplier's terms are leaving you unsure, get in touch and we will translate them into what it really means for your shipment.
Frequently asked questions
Which Incoterm is best for a UK importer buying from China?
For most UK SMEs, FOB is the sensible default for sea freight (or FCA if you are shipping by air). The supplier handles its side up to the origin port, including export clearance, and you take control of the main transport and costs from there. It gives a clean handover and lets your freight forwarder manage the leg into the UK. DAP is also worth considering if you would rather the goods came all the way to your door and you are happy to handle UK import clearance yourself.
What is the difference between DAP and DDP?
With DAP (Delivered At Place) the seller brings the goods to your agreed UK address, but you handle UK customs clearance and pay the import duty and VAT. With DDP (Delivered Duty Paid) the seller is supposed to cover those import charges too. The catch is that an overseas seller often cannot easily act as the UK importer of record after Brexit, so DDP can stall at the border. Many UK importers find DAP simpler and safer in practice.
Why can DDP go wrong for UK shipments?
DDP asks the seller to clear the goods into the UK and settle import VAT and duty, which means someone has to act as the importer of record here. Since Brexit, overseas sellers frequently are not set up to do that or to reclaim import VAT properly, so shipments can get held up at customs while it is sorted out. If a supplier offers DDP, ask exactly who will act as importer of record in the UK before you accept it.
Do I have to use the current Incoterms 2020 version?
Incoterms 2020 is the current set published by the International Chamber of Commerce, and it is what most contracts now reference. Older versions still exist and can be used if both parties agree, but it is cleaner to state the version explicitly, for example "FOB Ningbo (Incoterms 2020)", so there is no ambiguity about which rules apply. Note that Incoterms 2020 renamed the old DAT term to DPU.