A lot of our customers came to us in the run up to December 2020 with thoughts of changing current DAP Incoterms to DDP for exports, perhaps in fear that their EU customers will find purchasing from the UK less financially attractive should tariffs be imposed bilaterally.
DDP, or Delivered Duty Paid, places the maximum responsibility on the seller as it also involves the destination import clearance and payment of VAT and duties applicable. They also become susceptible to storage and demurrage costs should they arise, even to the point that the buyer may have failed to procure important documents such import licences.
Our industry body BIFA posted a concise article about this in their September 2020 magazine and a link can be found here at page 16.
Having a Free Trade Deal, this perhaps seems unnecessary. A good alternative to consider, which is becoming more popular, is an adjustment to Incoterm DAP by suffixing with ‘cleared’. So DAP <named place> cleared. By using this variant, the exporter pays for the import clearance process, whilst the importer benefits from preferential duty (see Rules of Origin) under the Free Trade deal, and settles any import VAT for recovery in their VAT returns.
However, some customers are bowing to pressure from their EU customers thus insisting on DDP. So how can we handle this? There is an option is to utilise Customs Regime 40 or 42. This has been around for a long time, and provides for an exemption to pay Import VAT at the time of importation, subject to various conditions. If you would like to find out more about Customs Regime 40 and 42, see Regime 40 & 42 – the ‘barcode’ method.
Is DDP really worth it though?
Well, as long as the goods are able to claim preferential origin, there is no duty to pay. The consignee would have to pay the Import VAT, but recovers it in their returns. The exporter could adopt DAP cleared and pay the import clearance charges. Also, as time has passed, several EU countries are now adopting PVA (Postponed VAT Accounting) as we have, so even the Import VAT is postponed and does not present any cash flow problem.
Each case is different and it probably boils down to the relationship between exporter and consignee. saying that, in truth, it just needs exporter and importer to accept that life has changed and that there are different processes to undertake.
Summarising the Incoterm with its possible variations:
- Strict DDP – everything paid by the exporter. In this case, the exporter must have a VAT number in the destination country plus an EU EORI number and have a fixed establishment in the EU, or appoint a fiscal representative. This is so that the exporter can reclaim the Import VAT
- Like DAP duties and fees paid – VAT to the account of the importer. In this case, the exporter does not need a destination VAT number or EU EORI number or a fixed establishment or a fiscal representative as the VAT is paid by the importer who will reclaim it in their periodic VAT returns
- So, if the agreement is as per item 2, then DDP is effectively DAP duties and fees paid.
- Let us now take this a step further and look at the rules of origin (https://ital-logistics.com/brexit/rules-of-origin/)
- If the goods are of UK origin and are exported to the EU, then there is no duty to pay. So, if there is no duty to pay, why not use DAP Cleared?
- If the goods are not of UK origin then duty may be applicable. In this case use DAP duties and fees paid
- In any case, unless the importer means as per DDP section 1, we can get the same result using DAP variants
Whatever is decided between trading companies, just be mindful that DDP opens a can of worms and complexity that in truth, with some common sense, can be side-shifted.