The EU Payment Demand
The UK's increased EU Budget contribution
1. On 17 October 2014, the European Commission informed
HM Treasury that the UK would have to make an additional contribution
to the EU budget of approximately €2.1 billion.[1]
This additional contribution had been prompted by revisions to
EU Member States' historic Gross National Income (GNI) data, dating
back to 1995.[2]
2. Member States make several annual contributions
to the EU budget, by far the most significant being a levy on
GNI. This levy is charged as a percentage rate on Member States'
annual GNI, with the rate set at a level designed to cover exactly
the portion of the EU Budget which remains unfunded once the other
sources of income—namely 'Traditional Own Resources' and
VAT-based resources—have been taken into account.[3]
The result is that an individual Member State contributes to this
portion of the budget in proportion to its share of total GNI
across all Member States. In 2013, GNI-based contributions amounted
to 74 per cent of the EU's total budget.[4]
3. Owing to the importance of GNI in determining
Member States' contributions to the EU budget, the EU statistical
office (Eurostat) carries out regular audits of the methods and
data used to estimate GNI.[5]
EU legislation makes clear that Member States' GNI-based contributions
from previous years can be changed retrospectively, if any retrospective
corrections are made to the GNI data for those years as part of
this process.[6] These
changes to Member States' EU budget contributions are known as
"adjustments".
4. There is a four-year time limit on these retrospective
adjustments, but this time limit may be disapplied in the case
of adjustments "notified within this time limit either
by the Commission or by the Member State".[7]
Any adjustments must be settled with the Commission "on the
first working day of December" of the year in which the adjustments
are calculated.[8]
5. In May 2014, the Office for National Statistics
(ONS) announced that there would be a number of changes to previous
UK GNI figures dating back to 2002. This was part of a revision
exercise across Member States, designed to address various problems
uncovered in a comprehensive audit by Eurostat in 2012. This audit
had suggested that Member States were not calculating GNI in a
consistent and comparable way.[9]
These revisions dated back as far as 1995 for some Member States,
but they met the conditions for an exemption from the four-year
time limit since the data they revised had been automatically
marked as provisional by Eurostat—which is part of the European
Commission—upon initial publication. The data were only
classed as final once Eurostat had inspected them and Member States
had addressed the issues identified.[10]
6. Member States were asked to submit their revised
GNI figures to Eurostat by 22 September 2014.[11]
On the basis of these, Eurostat recalculated the GNI-based contributions
of each Member State dating back to 1995. Those Member States
whose GNI made up a larger proportion of total EU GNI than initially
thought would be required to pay an additional amount to cover
the difference; those whose GNI made up a lower proportion would
receive a credit. The amended figures were presented at a meeting
between Eurostat, the Directorate General for Budget, and Member
States' finance ministries, on 17 October 2014.[12]
The data revealed that the UK's economy had performed better than
previously thought relative to other Member States since 1995.
For the UK, the result was an additional contribution of €2.1
billion (£1.7 billion), to be paid by 1 December 2014.[13]
The UK Rebate
7. The call for additional contributions was met
with resistance by the UK Government. The Prime Minister, who
was informed of the payment demand on 23 October, spoke of "downright
anger about […] the completely unjustified and sudden production
of the bill", and told a press conference at the European
Council meeting on 24 October that "I'm not paying that bill
on 1 December, if people think I'm going to they've got another
think coming."[14]
8. The Chancellor was also critical of the demand.
Arriving at ECOFIN on 7 November, he said:
The demand that Britain pays £1.7 billion
on 1 December is unacceptable. I wanted that discussed at this
meeting of European Finance Ministers. I wanted it on the agenda,
it is on the agenda, and I will make sure we get a better deal
for Britain.[15]
9. Emerging from ECOFIN later on 7 November 2014,
the Chancellor claimed to have secured major concessions on the
bill:
[W]e have worked intensively and constructively
with the Vice President of the Commission, and with the other
Member States, and today I can say this. Instead of footing the
bill, we have halved the bill, we have delayed the bill, we will
pay no interest on the bill, and if there are mistakes in the
bill we will get our money back. We have also changed permanently
the rules of the European Union so this never happens again. This
is far beyond what anyone expected us to achieve and it's a result
for Britain.[16]
Asked how he had managed to halve the bill, the Chancellor
said:
Well the bill, instead of being £1.7 billion
will be around £850 million. The British rebate will apply
in full, and in the year in which the payments are made. We will
pay in two instalments in the second half of next year, and instead
of challenging the law, we have actually changed the law, so it's
a real result for Britain.[17]
EXAMINING THE CHANCELLOR'S CLAIMS
AT ECOFIN
10. The Chancellor's claim to have delayed the bill
without the need to pay interest is borne out by the facts—on
7 November, ECOFIN invited the Commission to come forward with
a regulation allowing for payments to be deferred over a reasonable
time period in exceptional circumstances. In response, the Commission
proposed a new regulation on 12 November, which provided for payments
of an exceptional size to be delayed interest-free until 1 September
in the year following the calculation of adjustments.[18]
11. By contrast, there was little evidence at the
time to support the Chancellor's claim to have halved the bill,
either at ECOFIN or through separate negotiations with the Commission.
The claim was based on the inclusion of the 'British rebate'—also
known as the 'UK rebate', the 'UK correction' or the 'UK abatement'—in
the net payment figure to the EU. The rebate, which has been part
of the EU financial framework since the Fontainebleau Council
of 1984, provides for the UK to receive a downward adjustment
to its EU budget contributions based on a range of factors, including
UK and EU-wide VAT and, crucially, UK and EU-wide GNI.[19]
Changes to GNI, such as those which prompted the UK's increased
budget contribution of €2.1 billion, may therefore imply
changes to the UK rebate calculation.
12. The precise method for calculating the rebate
is laid down in great detail in Council Decision 2007/436/EC,
and in the supporting Council document 'Method for the calculation
of the UK correction'.[20]
These documents make it clear precisely how GNI figures feed into
the rebate—and therefore how adjustments to GNI figures
lead to adjustments to the rebate—in a quantifiable manner.[21]
Furthermore, they make it clear that there is a set process for
adjusting previous years' rebates when historic GNI data is revised.
Specifically, the supporting Council document describes how a
'provisional' amount for the rebate is calculated in the year
to which it relates, based on the data known at the time. A 'definitive'
amount is then calculated four years later, on the basis of "the
VAT and GNI bases and the allocated expenditure estimates relating
to year t as they are known at 31 December t+3".[22]
13. This suggests that UK rebates are routinely revised
in response to the GNI revisions up to four years after the year
to which the rebate relates. The supporting Council document also
provides for revisions to be made with less than a four-year time
lag if they are likely to be particularly large.[23]
14. The framework described above does not appear
to leave a great deal of room for uncertainty—it appears
to suggest that rebates at least as far back as 2010 would inevitably
be adjusted in response to the same GNI revisions that gave rise
to the €2.1 billion additional payment, and that this should
have been clear to HM Treasury as soon as the revised GNI data
were known.
15. With such a detailed framework in place, it was
unclear to the Committee what the Chancellor could have achieved
through negotiation. Asked whether he had really halved the bill
as a result of his negotiation, the Chancellor replied:
As I said to the House of Commons, it was not
clear at all that the rebate would apply to the extent that it
did.[24]
Asked why there was any uncertainty that the
rebate would apply, the Chancellor said "Because it was such
a novel situation".[25]
When the question was repeated in similar terms, the Chancellor
said:
It is not a unilateral decision of the British
Treasury or the British Government to just say, "This is
our rebate. We are entitled to it. Pay up". The way this
works and has always worked is there is a negotiation with the
European Commission.[26]
When it was put to the Chancellor that the negotiation
was on the basis of an extremely detailed framework of rules,
laid down by the Council, which has always applied in the past
and which applied in this case, the Chancellor replied, "There
was no precedent for this situation".[27]
16. Mark Bowman, Director General International and
EU at HM Treasury, told the Committee:
In terms of this additional payment, it was not
clear that the rebate was going to apply. It was not mentioned
in any of the Commission communications upfront. It was not clear.
This was an unprecedented situation. We had never seen revisions
of this scale going back so many years and there was absolutely
no clarity at all that the rebate would apply.[28]
Asked why he thought that the rebate might not apply,
given the detailed framework in place, Mr Bowman replied variously:
Because this was an unprecedented situation.
We had never had an adjustment on this scale going back so many
years.[29]
It was unclear at that stage that the rebate
did apply. Obviously we hoped that the rebate did apply and we
engaged very seriously with the Commission to establish that it
did apply.[30]
This was an unprecedented situation in terms
of the scale of the adjustments and in terms of going back so
many years. This is an incredibly complex part of the rebate calculation.[31]
17. The Chancellor was asked to clarify to whom it
was unclear that the rebate would apply. He replied:
[I]t was not clear to anyone because the Commission
made no comment on the rebate when they first gave us the numbers.
There was considerable uncertainty in Europe about that. In the
House of Commons, no one other than Andrew Lansley asked a question
about it […].[32]
Mr Bowman also said that the rebate was not mentioned
in any of the Commission communications upfront:
When the Commission came out with their request
for the £1.7 billion payment, there was no mention from the
Commission that the rebate would apply.[33]
But when asked if the Commission had said that the
rebate would not apply, Mr Bowman said: "No, there
was no discussion of the rebate."[34]
Asked why the Commission would need to mention the rebate when
it issued its request for the increased contribution, given that
the rebate always applied, Mr Bowman replied:
It was a very newsworthy event, so you would
have thought the Commission would mention it if it was clear to
them that it would apply at that stage.[35]
18. One area of potential uncertainty—to which
neither the Chancellor nor Mr Bowman explicitly alluded—was
whether rebates from years before 2010 would be adjusted. The
process set out in the supporting Council document only prescribes
that rebates dating back four years must be adjusted, and does
not explicitly provide for revisions to earlier years. It might
therefore have been unclear whether all the GNI revisions, dating
back to 1995, would result in adjustments to the rebate. However,
a detailed breakdown of the £850 million figure, which would
explain how any such uncertainty was resolved, has not been provided
by the Treasury. Responding to a request from the Committee for
this information, the Chancellor said that the Commission had
"not produced a breakdown showing how the total figure relates
to each individual year".[36]
Conclusions
19. Emerging from the ECOFIN summit of 7 November
2014, the Chancellor claimed to have "halved the bill"
of £1.7 billion demanded by the EU. He later described this
as the result of "hard-fought negotiation" with the
Commission to ensure that the consequential change to the UK's
rebate would apply.
20. The calculation of the rebate, and the circumstances
in which it applies, are embedded in EU law. This is set out in
detail in Council Decision 2007/436/EC and the supporting Council
document on the UK correction. These documents establish the precise
method for calculating the rebate. They also provide for past
rebates to be adjusted in response to GNI data revisions, such
as those which prompted the rebate's revaluation in this case.
It does not appear to the Committee that these documents left
a great deal of room for uncertainty.
21. The Chancellor and Mark Bowman, HM Treasury's
Director General for International and EU, both insisted to the
Committee that there was "real doubt" and "absolutely
no clarity" that the rebate would apply. They claimed variously
that there was uncertainty for three reasons: the revisions were
of an unprecedented scale; the revisions arose from an "incredibly
complex" part of the rebate calculation; and the Commission
did not mention the rebate when it initially presented the £1.7
billion bill.
22. While the Committee recognises the achievement
of extending payment terms and of the removal of interest charges,
it finds each of the arguments in the paragraph above unpersuasive.
There is no limit to the scale of the rebate in either the Council
Decision or the supporting Council document. The complexity of
the rebate calculation does not make it less certain, less clear
or ambiguous. On the contrary, the complex and detailed published
explanation of the method of calculation has the effect of reducing
ambiguity and uncertainty. In fact, the question of whether the
Commission "mentioned" the rebate when the increased
bill was first presented has no bearing on whether, under EU legislation,
the rebate was bound to apply or not. It is surprising that HMT
officials had not realised this.
23. There is one source of potential doubt, to
which Mr Bowman alluded. He told the Committee that the application
of the rebate was uncertain because there had never been a set
of revisions dating back so many years. Though neither Mr Bowman
nor the Chancellor made this clear in evidence, this might have
referred to the supporting Council document that appears only
to require the rebate to be adjusted as far back as four years.
If, however, this was a point of uncertainty, it would only apply
to budget contributions prior to 2010. The rebate of later years
should not have been in doubt, and so the specific claim to have
halved the bill through negotiation is difficult to support. Furthermore,
if this was a point of uncertainty, then the Treasury could have
clarified it long before, since it knew in May 2014 that revisions
to GNI data could lead to revised budget contributions dating
back to 1995. It could also have secured a permanent rule change
to address the uncertainty, since any ambiguity in the rebate
calculation exposes the UK to significant budgetary risk. No breakdown
of the £850 million rebate adjustment has been published.
It therefore remains unclear whether this point—that is,
whether rebates prior to 2010 were revalued in response to the
GNI revisions—was resolved in the Treasury's favour.
24. On the basis of the evidence the Committee
has seen, it should have been unambiguously clear to the Treasury,
well in advance of ECOFIN on 7 November 2014, that the UK was
entitled to a rebate on any additional budget contributions that
could arise from the GNI revisions. Again on the basis of the
evidence the Committee has seen—and setting aside any possible
uncertainty about the four-year time limit for adjustments described
above—the size of this rebate would have been automatically
determined by the method laid out in the Council documents once
the revised GNI and budget contribution figures were finalised
on 17 October. If there were any uncertainty about the method
for calculating the rebate set out in the Council documents, then
it is unclear why the Government did not explain exactly what
this uncertainty was and how it had arisen. Even if there were
any uncertainty about whether the method applied in this particular
case, the detailed framework to address it was available from
the relevant documents. We note that the Commission did not at
any stage suggest to HM Treasury that the rebate would not apply.
25. At the ECOFIN summit, it was agreed that,
on this occasion and in future, Member States could delay the
payment of particularly large bills resulting from GNI revisions
and other adjustments. This delay of the UK's bill, part of a
permanent change to the EU's financing rules, was a considerable
achievement. By claiming a victory for having "halved the
bill"—a claim not supported by the facts—the
Chancellor distracted attention from that achievement. Claim and
counter-claim are likely to be commonplace in the UK's debates
on EU matters. The public should be put in a position to reach
a view based on the facts.
1 Q 46; European Commission, 'Information note for
Member States', 17 October 2014, page 3 Back
2
European Commission, 'Information note for Member States', 17
October 2014, page 3 Back
3
European Commission, 'European Union Public Finance, 4th
Edition', page 241; 'Traditional own resources' consist mainly
of customs duties on imports from outside the EU and sugar levies.
VAT-based resources are gathered through a uniform rate of 0.3
% which is levied on the harmonised VAT base of each Member States.
See http://ec.europa.eu/budget/mff/resources/index_en.cfm Back
4
European Commission, 'EU expenditure and revenue', accessed 18
February 2015 Back
5
Office for National Statistics, 'Latest developments to National
Accounts', 16 May 2014 Back
6
Specifically, Article 10(7) of Council Regulation (EC, Euratom)
No. 1150/2000, as amended by Council Regulation (EC, Euratom)
No 105/2009, states that "Any changes to the GNI of previous
financial years pursuant to Article 2(2) of Regulation (EC, Euratom)
No 1287/2003 subject to Article 5 thereof, shall give rise for
each Member State concerned to an adjustment to the balance established
pursuant to paragraph 6 of this Article. This adjustment shall
be established in the manner laid down in the first subparagraph
of paragraph 5 of this Article." Back
7
Council Regulation (EC, Euratom) No. 1150/2000, Article 10 (7) Back
8
Council Regulation (EC, Euratom) No. 1150/2000, Article 10 (7) Back
9
Office for National Statistics, 'Latest developments to National
Accounts', 16 May 2014 Back
10
Office for National Statistics (EU10002) paragraphs 32-33 Back
11
Office for National Statistics (EU10002) Annex C paragraph 8 (ix) Back
12
Q 46; Office for National Statistics (EU10002) Annex C paragraph
8 (xvi) Back
13
European Commission, 'Information note for Member States', 17
October 2014, page 3. Note that the adjustments do not sum to
zero, since, as well as reflecting GNI revisions, they reduce
total GNI-based contributions by €420 million to account
for an increased forecast for Traditional Own Resources. Back
14
Oral evidence taken before the European Scrutiny Committee on
4 November 2014, HC (2014-15) 789, Q1; http://tvnewsroom.consilium.europa.eu/event/european-council-october-2014-day-2/national-briefing-united-kingdom-part-141
Back
15
http://tvnewsroom.consilium.europa.eu/event/ecofin-council-november-2014/arrival-and-doorstep-uk-osborne6
Back
16
http://tvnewsroom.consilium.europa.eu/event/ecofin-council-november-2014/departure-and-doorstep-uk-osborne4 Back
17
http://tvnewsroom.consilium.europa.eu/event/ecofin-council-november-2014/departure-and-doorstep-uk-osborne4
Back
18
Proposal for a Council Regulation amending Regulation (EC, Euratom)
No 1150/2000 implementing Decision 2007/436/EC, Euratom on the
system of the European Communities' own resources, COM (2014)
704, page 5;Council of the European Union, 'Presidency conclusions
on the budgetary issues in the current year and on the request
to the Commission to submit a proposal for amendment of Regulation',
7 November 2014 Back
19
European Commission, 'European Union Public Finance, 4th
Edition', pages 242-245 Back
20
Council Decision 2007/436/EC, Article 4; Council of the European
Union, 9851/07 ADD 2, 23 May 2007 (referred to by the European
Commission as 'Method for the calculation of the UK correction'
on its 'Financing system' website, accessed 18 February 2015) Back
21
Council of the European Union, 9851/07 ADD 2, 23 May 2007, pages
7-11 Back
22
Council of the European Union, 9851/07 ADD 2, 23 May 2007, page
16 Back
23
Council of the European Union, 9851/07 ADD 2, 23 May 2007, page
16 Back
24
Q 2 Back
25
Q 6 Back
26
Q 8 Back
27
Q 9 Back
28
Q 28 Back
29
Q 31 Back
30
Q 34 Back
31
Q 35 Back
32
Q 3 Back
33
Q 29 Back
34
Q 30 Back
35
Q 42 Back
36
Letter from the Chancellor to the Chairman of the Treasury Committee
(EU10001) Back
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