Documents considered by the Committee on 16 October 2019 Contents

1Brexit: UK contributions to the EU budget in 2019 and 2020 in a ‘no deal’ scenario

Committee’s assessment

Politically important

Committee’s decision

(a) Not cleared from scrutiny; recommended for debate on the floor of the House (decision reported on 3 April 2019); (b) Not cleared from scrutiny; further information requested; recommended for debate on the floor of the House; drawn to the attention of the Committee on Exiting the EU, the Public Accounts Committee and the Treasury Committee

Document details

(a) Proposal for a Council Regulation on measures concerning the implementation and financing of the general budget of the Union in 2019 in relation to the withdrawal of the United Kingdom from the Union; (b) Proposal for a Council Regulation on measures concerning the implementation and financing of the general budget of the Union in 2020 in relation to the withdrawal of the United Kingdom from the Union

Legal base

(a) and (b) Article 352 TFEU and Article 203 EURATOM; special legislative procedure; unanimity

Department

Treasury

Document Numbers

(a) (40348), 5933/19, COM(19) 64; (b) (40810), 11921/19, COM(19) 461

Summary and Committee’s conclusions

1.1The issue of the UK’s net contributions to the EU budget, which totalled an estimated £6.5 billion in 2017,1 was one of the key issues during the referendum that lead to the UK’s notification of its withdrawal from the European Union, sent by the then-Prime Minister in March 2017. The subsequent Brexit negotiations under Article 50 TEU demonstrated that the question of those contributions has remained controversial, even as the UK prepares to leave the EU. As set out in more detail in ‘Background’ below, and in our various Reports on the EU budget over recent years,2 the unique nature of the Union’s approach to spending means that much of the expenditure committed from the EU budget prior to the UK’s departure—still scheduled for 31 October 20193—would still have to be paid after it has already left.

1.2The Government announced on 13 July 2017 that, as a matter of international law, the UK “has [financial] obligations to the EU, and the EU obligations to the UK, that will survive the UK’s withdrawal”.4 Under the terms of the financial settlement subsequently set out in the draft Brexit Withdrawal Agreement, the UK would pay into the EU budget as if still a Member State until 31 December 2020. Afterwards, it would contribute towards EU spending commitments made before that date, but which had not yet been paid by that point. In 2019 and 2020 alone, the EU’s annual budgets foresee a gross UK contribution, minus the rebate, of roughly €36 billion (£32 billion).5 However, given the rejection of that Withdrawal Agreement, and therefore the settlement, by the House of Commons on three occasions, minds have inevitably turned to how the financial question would be dealt with in a ‘no deal’ scenario.

1.3On the EU’s side, it has been clear for some time that the other Member States will continue to press the UK for a financial settlement of any residual obligations to the EU budget even after a ‘no deal’ Brexit. The European Commission said the UK would have to agree to settle the “financial commitments made as a Member State”, calling it a “precondition” for negotiations on a new UK-EU relationship.6

1.4More importantly, as we discussed in our Reports of 13 March and 3 April 2019, the 27 remaining EU countries have already adopted a detailed contingency budgetary framework—Regulation 2019/1197—in the event the UK leaves the EU without a financial settlement in place. Under this legislation, UK-based entities would mostly remain eligible to receive EU funding from ‘exit day’ until the 31 December 2019, provided the Treasury agreed to keep paying into the EU budget during that period. Despite the UK paying its full contribution under these proposals, UK-based entities would be barred from accessing certain types of EU funding after a ‘no deal’ Brexit. These include money for security-sensitive projects related to defence,7 as well as the EU’s new €750 million (£668 million) emergency support programme for businesses affected by a ‘no deal’ Brexit.8

1.5In September 2019, the European Commission published a supplementary legislative proposal that would extend the EU’s favoured ‘no deal’ budget arrangement until the end of 2020, again provided the Treasury settles the UK’s full gross contribution for that year (currently estimated to be approximately €18.5 billion, or £16.5 billion). This proposal is now being considered by the Member States in the Council and by the European Parliament (which must both approve of the legal text before it can become law).9 Indeed, as the draft measure has a legal basis which requires adoption by unanimity within the Council,10 the UK technically retains a veto right until it ceases to be a Member State.

1.6We have set out the context and substance of the EU’s budgetary proposals in a ‘no deal’ scenario, and the Government’s response to date, in more detail in “Background” below.

1.7The UK Government, under both the current and previous Prime Minister, have so far refused to confirm explicitly where consideration is being given to the EU’s request for continued contributions even in a ‘no deal’ Brexit scenario. The Chancellor of the Exchequer did so again in a letter to us dated 30 September 2019 (but not received by our staff until 7 October) in which he said that—in such a scenario—the Government would “have to determine what financial obligations the UK has to the EU” and “any decision” on whether the UK would accept the EU’s request for continued budget payments would “be taken, if necessary, in this context”. Given the potential financial implications of an affirmative decision, we have repeatedly asked for a debate on this matter to take place on the floor of the House of Commons, but the Government has to date refused to make time for this. We have also yet to receive a detailed Explanatory Memorandum from the Treasury on the substance of the latest Commission proposal.

1.8In his letter, the Chancellor also referred to the possibility of the UK blocking adoption of the proposed EU Regulation asking for UK ‘no deal’ contributions for all of 2020. The Government retains a right of veto over the proposal while the UK remains a Member State, but according to the Chancellor this is not relevant, because a vote would not be taken “until the end of the year, after the UK’s exit from the European Union”. We were also told this previously in relation to the Brexit Budget Regulation for 2019. In fact however, that vote was brought forward and taken in July, while the UK was still a Member State. Notably, the Government did not block its adoption (despite having the power to do so). The Chancellor’s letter also does not appear to take into account the possibility of a further extension of the UK’s EU membership into 2020, as approved by Parliament under the European Union (Withdrawal) (No 2) Act 2019.

Our conclusions

1.9The issue of the UK’s contributions to the EU budget has been a vexing matter for almost as long as the UK has been a Member State of the Union.

1.10The EU’s financial demands of the Treasury in the context of the UK’s withdrawal, while extremely contentious, are at least clear. Whether under a Withdrawal Agreement or a ‘no deal’ scenario, it insists the UK has financial obligations related to the EU budget agreed during its membership, which it would have to meet as a “precondition” for talks on a future trade agreement. Whether the EU’s position—to reject any trade talks with the UK until there is a financial settlement—can be sustained in the event of a ‘no deal’ Brexit is a matter of debate and disagreement. However, it is incontrovertible that the EU’s position on its view of the UK’s commitments is clear. It has put in place detailed legislation—with the Government’s consent—to establish how it would seek British contributions in a ‘no deal’ scenario, and what the UK taxpayer might expect in return.

1.11Such clarity of position is sadly lacking when it comes to the UK Government. The Treasury’s view under the new Prime Minister still appears to be that there are some financial “obligations” to the EU that would “survive” the UK’s withdrawal irrespective of the circumstances of Brexit, since statements made under Prime Minister Theresa May to that effect made repeatedly since 2017 have not been explicitly rescinded. On 7 October,11 the Chancellor again refused to deny outright the possibility that the Government may make continued contributions to the EU budget even in a ‘no deal’ scenario.

1.12The Prime Minister himself has argued repeatedly that any further extension of the UK’s membership of the EU under Article 50 TEU should be avoided, because it would cost the UK “more than £1 billion a month” in contributions to the EU budget.12 Given that these payments would also have to be made under the financial settlement set out in the draft Withdrawal Agreement, the only scenario in which they could conceivably not be due is the ‘no deal’ eventuality. It is extremely disappointing therefore that the Government is unable to say explicitly and clearly, six months after we first made inquiries, whether it may make continued payments into the EU budget even in a ‘no deal’ scenario in line with the proposals made by the EU.

1.13The Government’s silence about the EU’s request for continued contributions also has implications for our scrutiny of Ministers’ actions in Brussels. As noted, the EU Regulation extending the proposed ‘no deal’ financial arrangement until the end of 2020 still has to be approved unanimously by the Member States in the Council. While the UK is represented there, the Prime Minister could exercise the UK’s veto to stop the proposal from being adopted, for example to send a political signal about the Government’s intentions not to pay in the event of ‘no deal’. This would of course be a symbolic act only, since the EU Regulation itself could not force the UK to make contributions after it has left the EU.13

1.14In his letter of 30 September, the Chancellor told us that the UK’s right of veto was effectively irrelevant because a vote on the 2020 ‘no deal’ budget proposal would only be taken in the Council of Ministers at “the end of the year, after the UK’s exit”. We have had our concerns about the UK’s voting intention on this issue dismissed previously for the same reason, in relation to the EU’s ‘no deal’ budget Regulation for 2019. That vote was eventually taken while the UK was still part of the EU, with the Government abstaining and in the process overriding our scrutiny reserve on such a crucial proposal. Given that Parliament has already instructed the Prime Minister to seek a further extension of the UK’s EU membership into early 2020 to avoid a ‘no deal’ scenario, it is clearly a distinct possibility this second EU proposal asking for ‘no deal’ contributions from the UK will be voted on while the Government still has a seat in Council. We therefore again ask the Minister to clarify how the UK would vote on this Regulation if it were to be presented to the Council for approval while the UK is still a Member State, and to seek scrutiny clearance if necessary prior to the vote.14

1.15Overall, it is clear the Treasury feels unable to categorically reject the EU’s demand for continued contributions even if the Withdrawal Agreement is not ratified. This in turn can only serve to fuel suspicion that such payments—amounting to many billions of pounds—are, indeed, under consideration. More broadly, whether or not the UK agrees to a financial settlement after a ‘no deal’ withdrawal is likely to have a significant impact on our future relations with the European Union. To further inform parliamentary debate on this matter, we have set out some relevant considerations of the UK’s options, and their potential consequences, below.

A cessation of UK contributions to the EU immediately after a ‘no deal’ Brexit

1.16The default legal position is that following a ‘no deal’ Brexit, the UK immediately ceases to make payments into the EU budget. Indeed, we presume that the European Communities Act 1972, which authorises the Treasury to make EU budget contributions from the Consolidated Fund, would have been repealed as of 1 November 2019 to ensure EU legislation no longer supersedes UK law. A new form of statutory authority, approved by Parliament, would be necessary for the Treasury to make any further EU contributions beyond that date.

1.17Politically, the case has been made—including by the Prime Minister—that withholding money at least initially could provide the UK with significant leverage in future trade negotiations with the EU on a post-Brexit economic partnership.15 Indeed, the Prime Minister himself has repeatedly said that an extension of the UK’s EU membership under Article 50 would cost the Treasury “more than £1 billion a month” in contributions to the EU, implying that this expenditure would be avoided in a ‘no deal’ scenario (since the financial settlement under the Withdrawal Agreement would also require the UK to make its budget contributions). Others have argued that the EU budget constitutes only a relatively small part of the remaining Member States’ total public expenditure, meaning the political leverage it could yield in trade talks would be limited.16

1.18Either way, should the UK stop making its payments immediately after a ‘no deal’ Brexit, it is clear that the EU would have to radically adjust its budget for 2020 to take into account the loss of a substantial net contribution (estimated to be £6.5 billion in 2017). The Commission would have to ask the remaining Member States for significant additional payments, and make cuts to EU funding programmes to ensure the Union’s expenditure and revenue remain in balance. By contrast, the UK could redirect its former net contribution towards domestic investment. We note, however, that if the Prime Minister’s policy is to use the leverage provided by withholding the UK’s payments to facilitate a new trade deal, implicitly those payments would still need to be made to the EU at a later stage if such a deal is agreed. The overall net benefit to the Exchequer would therefore be temporary.

1.19Moreover, any leverage the withholding of UK contributions might grant in trade negotiations with the EU-27 is being gradually eroded by the repeated extensions of the UK’s EU membership under Article 50. This is because the financial settlement contained in the draft Withdrawal Agreement sets 31 December 2020—the end of the EU’s current Multiannual Financial Framework—as a turning point: broadly speaking, for any EU spending decisions taken before that date, the UK should contribute what it would have done as a Member State; for those taken afterwards, from 1 January 2021, the EU-27 themselves are fully responsible.

1.20It follows from the above that the extension of the Article 50 period from 29 March to 31 October 2019 already cut the amount the EU will need to request from the UK towards its 2019 and 2020 budgets significantly, because the UK has remained a Member State with full legal obligations to contribute to the EU budget for longer than originally anticipated. As a result of the extension, the Treasury has been making continued payments to the European Commission (which would now be deducted from any post-Brexit financial settlement). The possible further extension of the UK’s EU membership until January 2020, as envisaged by the European Union (Withdrawal) (No 2) Act 2019, would whittle down the amount the EU needs from the UK after Brexit even more. The closer the UK’s withdrawal falls to the end of the Multiannual Financial Framework in December 2020, the easier it will become for the EU to mitigate any shortfall in revenues owing to a lack of UK contributions.17

1.21Without continued UK contributions, there will also be immediate practical consequences: the EU would cease to pay out most types of pre-agreed funding commitments to British recipients (such as research grants or regional development funds).18 To mitigate the impact of this, the Government has unilaterally agreed to compensate British recipients for most types of EU funding to which they would lose access immediately after Brexit in the absence of a financial settlement with the EU. The Treasury announced on 30 September that this ‘EU Guarantee’ would be allocated £4.3 billion of taxpayer support for the period from 1 November 2019 to 31 March 2020 in a ‘no deal’ scenario.19 However, the guarantee is apparently not comprehensive: the Refugee Council has reported that the Home Office will not compensate UK charities for the lack of access to money from the EU’s Asylum, Migration & Integration Fund (AMIF), used to support refugees in Britain.20

1.22Moreover, in the longer term, a lack of an agreement on the financial issue between the UK and the EU would stymie any efforts to secure UK participation in EU in funding programmes of mutual interest, including the new generation of EU initiatives under its next Multiannual Financial Framework (2021–2027). In particular, without a financial settlement, there is no prospect of British organisations from participating fully within the Creative Europe Programme for investment in the creative industries; the Framework Programme for Research (‘Horizon Europe’); or the Erasmus+ student exchange programme.

Continued UK contributions to the EU even after a ‘no deal’ Brexit

1.23The situation we have considered above is the default scenario, namely one where the Government itself decides not to meet the EU’s demand for further contributions after a ‘no deal’ Brexit or where it lacks the necessary parliamentary authority to make such payments. However, the Government—including the new Prime Minister and his Chancellor—have so far refused to explicitly reject the EU’s offer for continued payments into the 2019 and 2020 EU budgets outright. It is therefore still a possibility the Government may seek to make such payments, either for legal or political reasons (or both).

1.24As we have said consistently since the publication of the original Commission proposal on UK budget payments after ‘no deal’ earlier this year, should the Government eventually agree to make continued contributions to the EU budget even in the absence of a treaty obligation to that effect, it would be extremely controversial. A number of important financial, legal and political considerations would need to be addressed:

Our recommendation

1.25Given the importance of the unanswered questions above should the Government decide to continue paying into the EU budget even in a ‘no deal’ scenario, we have put them to the Treasury before on a number of occasions. We have yet to receive a clear and unambiguous response showing how the Prime Minister intends to address the financial issue in the event of a Brexit without a Withdrawal Agreement. Nevertheless, we do still believe that this matter is of significant interest to both Parliament and the wider public. As such, we maintain our recommendation for a debate on the floor of the House on the EU’s requests for continued UK contributions until the end of 2020, even if the UK leaves the EU without a ratified Withdrawal Agreement. We urge the Government to make time for such a debate without delay.

1.26Furthermore, we have separately written on 16 October 2019 to the Chancellor of the Exchequer again asking him:

1.27We look forward to receiving his reply by 24 October 2019. We also draw these developments and our conclusions to the attention of the Committee on Exiting the EU, the Public Accounts Committee and the Treasury Committee.

Full details of the documents

(a) Proposal for a Council Regulation on measures concerning the implementation and financing of the general budget of the Union in 2019 in relation to the withdrawal of the United Kingdom from the Union: (40348), 5933/19, COM(19) 64; (b) Proposal for a Council Regulation on measures concerning the implementation and financing of the general budget of the Union in 2020 in relation to the withdrawal of the United Kingdom from the Union: (40810), 11921/19, COM(19) 461.

Background

1.28The UK’s contribution to the EU budget was one of the major points of contention in the referendum leading to Brexit. Figures released by the Treasury show that the UK’s net public sector contribution24 to the EU budget from 2012 to 2018 averaged £9.6 billion per year,25 money which could be redirected elsewhere domestically as and when the Government is no longer under a legal obligation to make payments to the EU.

1.29Given the UK’s status as a significant net contributor to the EU budget, the question of a Brexit financial settlement has featured prominently in the negotiations on a Withdrawal Agreement governing the terms of the UK’s departure from the Union under Article 50 TEU. The remaining Member States, as well as the European Commission and the European Parliament, have consistently insisted that the UK is due further contributions to the EU budget beyond its formal withdrawal. This is primarily the case because of the long-term nature of the EU’s financial planning, under which expenditure is ‘programmed’ over seven-year periods under a “Multiannual Financial Framework” (MFF), the current version of which runs from 2014 until 31 December 2020 and which was approved by the UK in May 2014.26 The separate EU legislation governing how Member States contribute to the EU budget during this MFF, the “Own Resources Decision” (ORD), was approved by Parliament under the European Union (Finances) Act 2015.

1.30The UK’s original departure date, 29 March 2019, would have fallen three-quarters of the way through the current MFF. In addition, the EU operates a ‘differentiated’ approach to much of its spending, where financial commitments made in one year—for example structural funds for infrastructure investment—are often not fully paid out until subsequent years (with expenditure committed towards the end of one MFF having to be paid during a subsequent budgetary period). In the context of Brexit, the overall effect of the EU’s unusual approach to its public expenditure is that many of the spending decisions taken by the Union during the UK’s membership will still need to be paid for after we are scheduled to leave the Union, a date currently fixed for 31 October 2019.27 These expenditure commitments made before the UK’s decision to leave were predicated on the overall budgetary limits set out in the current MFF for the entire 2014–2020 period, including the UK’s full contributions during that period.

1.31The UK’s withdrawal, and the cessation of its legal obligation under the EU Treaties to make its significant net contribution to the EU budget in the absence of a new financial agreement, would therefore necessitate significant reductions in planned EU spending for the last 14 months of the current Financial Framework, and also most likely require the remaining Member States—particularly Germany and France—to contribute more to cover any shortfall. In light of this, the remaining Member States have consistently called for the UK to contribute its full share of committed and planned EU expenditure under the entire 2014–2020 MFF, even if it exits the Union before the end of that budgetary period (on 31 December 2020).28

1.32The previous Prime Minister (Rt Hon. Theresa May MP) said in her Florence speech in September 2017 that she did not want the other Member States “to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave”, adding that the UK would “honour commitments we have made during the period of our membership”.29 The draft Withdrawal Agreement of November 2018 therefore contained a financial settlement—famously estimated by the Treasury to represent a net cost to the British taxpayer of £39 billion had we left on 29 March 201930—to that effect, including a requirement on the UK to pay into the EU budget as if still a Member State until the end of the current MFF in December 2020.31

1.33However, in the absence of a ratified Withdrawal Agreement, the so-called ‘no deal’ Brexit scenario, there would be no binding bilateral financial settlement between the UK and the EU from the date of exit to resolve any outstanding “obligations”. The UK and EU’s financial commitments to one another in such an eventuality remain unclear. As the House of Lords EU Committee concluded in March 2017, while the “UK would be subject to no enforceable obligation to make any [EU] financial contribution at all” in the absence of a treaty otherwise, any agreement on post-Brexit “future market access on favourable terms […] is likely to prove impossible to do so without also reaching agreement on the issue of the budget”.32

1.34The UK Government’s own position has been that “the UK has [financial] obligations to the EU, and the EU obligations to the UK, that will survive the UK’s withdrawal”, and that these need to be resolved “in accordance with the law”.33 That would seem to apply even in a ‘no deal’ scenario. The new Prime Minister (Rt Hon. Boris Johnson MP) alluded to these ‘survivable obligations’ even in a no-deal scenario in August 2019, when he said that in that case “the £39 billion is no longer strictly speaking owed” (emphasis added).34 In any event, without a binding Withdrawal Agreement implemented in UK law, there would be no clear legal basis for further UK payments into the EU budget. Indeed, the Treasury has already introduced legislation to remove EU budgetary law from the UK statute book in a ‘no deal’ scenario.

1.35Given the importance of this matter to the EU side, which would be faced with a significant budgetary shortfall without UK contributions, the issue of any ‘no deal’ payments by the Treasury is as much political as it is legal.

The EU proposal for continued UK contributions to the EU budget in a ‘no deal’ scenario

1.36As noted, the European Commission (as well as politicians in the 27 remaining Member States) has consistently said they would expect the UK to agree to a financial settlement even if the Withdrawal Agreement is not ratified, as a precondition for talks on a new UK-EU trade agreement. On the EU side, it has therefore been clear that the other Member States intend to press for continued UK payments into the 2019 and 2020 EU budgets—i.e. until the end of the current Multiannual Financial Framework—even in a ‘no deal’ scenario.

1.37In late January 2019, the European Commission therefore issued an emergency legislative proposal in the form of a Council Regulation that effectively invites the UK to continue making payments for the remainder of 2019, even as a non-Member State. The essence of the proposed Regulation is that, rather than amending the 2019 EU budget to reduce planned expenditure to take into account the potential lack of a UK contribution from ‘exit day’ onwards, the Treasury would make its planned gross contribution for all of 2019—set at €17.4 billion (£14.9 billion)—even if the Withdrawal Agreement is not ratified by the time the UK left the EU.

1.38Given the exceptional circumstances that have led the Commission to make this proposal, the legal basis for the draft Regulation was Article 352 of the Treaty on the Functioning of the European Union. This is a fall-back mechanism that allows the EU to take exceptional measures for which no explicit legal basis is provided elsewhere in the Treaties. Because of this, the proposal requires unanimous agreement of the Member States in the Council, and the consent of the European Parliament. As a consequence, the UK Government also needed to vote in favour of—or abstain on—the Regulation for it to be adopted while the UK is still a Member State. The proposal, like the Withdrawal Agreement, would only take effect from the date the Treaties cease to apply to the UK (initially planned for 29 March 2019, but now scheduled for 31 October following the extension of the Brexit negotiation period under Article 50 of the EU Treaty).

1.39The Commission proposal for a Brexit Budget Regulation for 2019 was approved by the European Parliament on 17 April and subsequently formally adopted by the Member States in the Council on 9 July. The UK Government abstained during the vote, enabling it to be passed. It overrode our scrutiny reserve in the process, after having first assured us that any vote would only be taken after the UK had already left the EU. The legislation was subsequently published in the Official Journal on 15 July 2019 as Regulation 2019/1197. Because the dates in the Regulation—for example the deadline for the UK to certify its agreement to continue making payments into the EU budget after a ‘no deal’ Brexit—were drafted before the extension of the Article 50 period, the European Commission circulated a Delegated Act in September 2019 to bring the deadlines in the legislation in line with the UK’s new scheduled date of withdrawal on 31 October.35

UK eligibility to receive EU funding

1.40Although the Commission proposal, if accepted by the UK, would notably prevent acrimonious negotiations with Member States about increasing their contributions to the EU by keeping the UK’s payments in place, its offer is, however, not entirely one-sided. In return for UK contributions to the EU budget for the remainder of 2019 even as a non-Member State, the Commission has proposed that:

1.41Continued flows of EU funding to the UK in 2019 as if it were still a Member State would be conditional on payments being made in a timely way, and the UK accepting the “controls and audits” which apply to EU spending programmes (including oversight by the European Commission, the European Court of Auditors and the EU’s anti-fraud body OLAF). The EU could suspend payments to UK recipients if the Government did not make the agreed payments or if “significant deficiencies” were observed in the way the funding was implemented (especially in areas of ‘shared management’, like Structural Funds, where EU funding is allocated to a public authority which then disburses it to the final recipients). The exceptions to this would be the provision of EU funding for UK students on an Erasmus exchange programme on ‘exit day’, and the continuation of the EU’s cross-border cooperation programmes involving Northern Ireland. For those funding commitments, the Commission has proposed separate ‘no deal’ contingency measures that are not directly dependent on the Government’s agreement to pay into the 2019 EU budget, although they are built on an expectation that it will.

1.42For other EU funding programmes, the precise scope of what UK entities could receive in return for the Treasury making the full payments for the 2019 financial year is limited. Under article 2 of the Regulation, UK persons or entities “shall continue to be eligible [for EU funding] in 2019” (emphasis added). That means that any payments due from 1 January 2020 would not be covered, even though much of EU funding awarded in 2019—for example for research projects or regional development—may not be due for disbursement until 2020 or later. That would limit the benefit the UK would derive from its continued eligibility unless it also agreed to pay into the 2020 EU budget (see below). Moreover, UK entities would be barred from EU funding related to programmes with a ‘security’ component, including notably the European Defence Industrial Development Programme and the Galileo satellite navigation programme. Similarly, the UK would only qualify for investment by the European Investment Bank as a ‘third country’, which translates into a far smaller share of investment.

1.43As noted, in terms of the financial cost of this arrangement, Article 2 of the Regulation stipulates that the UK’s payments in return for continued eligibility for EU funding in 2019 would be based on the UK’s share of the EU’s planned budget for this year. In December 2018, this was set at €148.2 billion in payment appropriations. The gross UK contribution for 2019 would be €17.4 billion (£14.9 billion). That figure includes the estimated rebate the UK would have received in 2019. The actual net contribution the Treasury would make to the EU until the end of 2019 would be less than this, after funding flowing back to the UK over the year as a whole is also taken into account. According to a report in the Daily Telegraph on 25 February 2019, the estimated net UK contribution for 2019 under the proposal would amount to roughly €7 billion (£6 billion).

1.44To date, in response to our enquiries, the Government has refused to explicitly state whether it would accept or reject the EU’s request for continued payments into the EU budget even in a ‘no deal’ scenario.

The Commission proposal for UK contributions to the 2020 EU budget in a ‘no deal’ scenario

1.45On 4 September 2019, the European Commission produced a second proposal for a Brexit Budget Regulation, this time in relation to the 2020 EU budget. If accepted by the Member States, again by unanimity under Article 352 TFEU, it would essentially replicate the provisions of Regulation 2019/1197 for next year’s EU budget. As such, there is no need for us to repeat the detailed legal and political assessment of the Commission proposals set out above and in our Reports of 13 March and 3 April 2019.

1.46The amount to be paid by the UK in 2020 under the Commission proposal would again be its full gross contribution.36 Negotiations between the European Parliament and the Member States on the size of the EU budget for 2020—and by extension the UK’s putative contribution to it—are still on-going, and could well last until December 2019. In anticipation of the finalised figure, the draft EU budget for 2020—presented by the Commission in June 2019—estimates a gross UK payment of approximately €18.5 billion (£16.5 billion). If the 2020 budget has not yet been definitively approved by the Parliament and Council on the date of the UK’s withdrawal from the EU or 1 January 2020 (whichever is later), the UK would be asked to contribute the amount originally estimated by the Commission in the draft budget. It is unclear if the EU would reduce the contributions requested from the UK if the finalised budget adopted subsequently foresees lower expenditure than originally anticipated.

1.47[As of 16 October 2019, the Chief Secretary to the Treasury (Rt Hon. Rishi Sunak MP) has not yet submitted the customary Explanatory Memorandum on the Commission proposal.] However, the Chancellor of the Exchequer wrote to us on 30 September to explain that—in the event of a ‘no deal’ Brexit—the Government would “have to determine what financial obligations the UK has to the EU” and “any decision” on whether the UK would accept the EU’s request for continued budget payments would “be taken, if necessary, in this context”. The UK again retains a right of veto over the proposal while it remains a Member State, since its requires unanimous agreement in the Council. The Chancellor dismissed this as irrelevant because the proposal would only be voted on at “the end of the year, after the UK’s exit”. We are not reassured by that assumption, given that the European Union (Withdrawal) (No 2) Act 2019 requires the Government, in the event that certain conditions are not met, to seek an extension of the UK’s membership of the EU into 2020 to avoid a ‘no deal’ scenario at the end of October. It is therefore a distinct possibility that the Government will still have its veto right when the Regulation is presented to Ministers for formal approval.

1.48In light of the Government’s ambiguity about the UK’s financial commitments to the EU after Brexit, we have again set out a number of questions to the Treasury in the above “Summary and conclusions” section of this Report above. We have also recommended the latest Commission proposal for debate on the floor of the House of Commons.

Previous Committee Reports

Fifty-ninth Report HC 301–lvii (2017–19), chapter 6 (13 March 2019) and Sixty-second Report HC 301–lx (2017–19), chapter 1 (3 April 2019).


1 See HM Treasury, “European Union Finances 2018: statement on the 2018 EU Budget and measures to counter fraud and financial mismanagement“ (June 2019), p. 15. The net contribution is calculated by taking the UK’s gross contribution, which was €13.7 billion in 2017, and subtracting the rebate (€7.4 billion) and EU funding flowing into the UK (€6.3 billion).

2 See for example our Reports of 18 July 2018, 9 January 2019, and 10 July 2019.

3 See European Council Decision 2019/584 of 11 April 2019, which extended the UK’s EU membership until 31 October 2019 and to which the UK Government signified its agreement by letter dated the same day. The definition of the UK’s ‘exit day’ from the EU under the European Union (Withdrawal) Act 2018 was amended accordingly by the European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019 (S.I. 2019/859).

4 Written Ministerial Statement HCWS43 by Rt Hon. David Davis MP, then Secretary of State for Exiting the EU.

5 The EU budget for 2019 foresees a total gross UK contribution of €17.5 billion, much of which will already have been paid if the UK leaves the EU as scheduled on 31 October 2019. The draft EU budget for 2020 as presented by the European Commission, which can still be amended by the European Parliament and the Member States, foresees a total gross UK contribution of €18.5 billion. The eventual net cost to the UK taxpayer after receipts from the EU budget are taken into account can only be calculated ex-post.

7 Principally, UK-based organisations would be barred from accessing funding under the European Defence Industrial Development Programme (EDIDP) and the Galileo satellite navigation programme.

8 This support would be provided from the EU Solidarity Fund and the European Globalisation Adjustment Fund. Proposals to that effect remain under scrutiny and we intend to publish a Report on them in the near future.

9 In early October 2019, the remaining Member States in the Council agreed on the finalised legal text of the Regulation, and submitted it for approval to the European Parliament. MEPs can only accept or reject the proposal, not make any amendments.

10 The proposal for a Regulation is based on Article 352 TFEU, a ‘last resort’ mechanism allowing the EU to legislate in areas where the Treaties do not otherwise confer competence for it to do so. To prevent abuse of this power, each Article 352 measure must be approved by unanimity among all Member State governments.

11 The Chancellor’s letter was dated 30 September 2019 but was not sent to Committee staff until 7 October 2019.

12 HC Deb (25 September 2019), vol. 664, col. 780.

13 As noted, any decision to make payments to the EU beyond Brexit would be for the Government to take, if necessary with the appropriate parliamentary authority.

14 The parliamentary scrutiny reserve would not apply in instances where the EU requires unanimity only if the UK votes against.

15 On 9 June 2019, the Prime Minister (then a backbencher) told the Sunday Times: “I think our friends and partners [in the EU] need to understand that the money is going to be retained until such time as we have greater clarity about the way forward. I always thought it was extraordinary that we should agree to write that entire cheque before having a final deal. In getting a good deal, money is a great solvent and a great lubricant”.

16 The 2014–2020 Multiannual Financial Framework limits the maximum ‘own resources’—revenue—the EU can raise from Member States to 1.2 per cent of the EU’s total GNI.

17 Already, the EU’s spending plans from 1 January 2021 do not envisage any UK contribution at all, so reductions to mitigate for a lack of British payments for funding commitments made before that date are easier to accommodate. However, they might still require painful cuts. In particular, the EU would still need to pay for any expenditure commitments taken before the UK’s exit but which remain outstanding after the date of its withdrawal (the “Reste a Liquider” or RAL). The Treasury’s estimate for the cost of the Brexit financial settlement indicated the UK’s contribution towards the RAL outstanding as of 31 December 2020 would amount to €21 to €23 billion.

18 The EU has adopted specific Brexit Regulations which mean that the PEACE Programme on the island of Ireland, and on-going student exchange visits undertaken by British residents, would continue to be funded in a ‘no deal’ scenario even if the UK did not pay any further EU budget contributions.

19 Written Statement HCWS1834, 30 September 2019.

21 On 25 February 2019, the Daily Telegraph reported that the Cabinet had signed off on a draft Statutory Instrument enabling the Treasury to continue making payments to the EU in a ‘no deal’ scenario. Such a legal instrument would be necessary because the Government’s current statutory authority to make payments to the EU out of the Consolidated Fund under the European Communities Act 1972 would have fallen away, and without being replaced by new powers under an Act of Parliament to implement the Withdrawal Agreement. The press reported that the Statutory Instrument for payments in a ‘no deal’ scenario would be made under the European Union (Withdrawal) Act 2018, potentially even under the negative—rather than affirmative—procedure.

22 As noted, the Withdrawal Agreement contained a financial settlement, the main part of which—relating to the MFF—broadly speaking consisted of three elements: contributions to the EU budget until the end of the current MFF in December 2020; a UK contribution towards the EU’s diminishing expenditure commitments that remain outstanding as of 1 January 2021 (the ‘Reste a Liquider’ or RAL); and a share of other EU liabilities accrued during the period of the UK’s EU membership, such as staff pensions and any pre-existing contingent liabilities on the EU’s books that may crystallise in the future. Accepting the first of those components by continuing to pay into the EU budget until the end of 2020 could also strengthen the EU’s hand when asking for a legal arrangement settling the other two components in the future.

23 The National Audit Office in its Report on “Exiting the EU: the financial settlement“ (20 April 2018) stated that the Treasury estimated the net cost of settling the RAL would fall between €21 and €23 billion, while the other liabilities were likely to cost the UK €2 to €4 billion. See figure 5 of the NAO report (page 18).

24 The Treasury’s figures for the UK net contribution to the EU budget, i.e. contributions minus EU funding paid to UK-based recipients, only takes into account money provided by the EU to UK public authorities for disbursement to the final recipients (like Common Agricultural Policy subsidies, which are managed by the Rural Payments Agency), as well as the UK rebate. It does not include EU funds provided directly to private sector recipients, such as research grants for universities or charities. The European Commission’s estimate for the UK’s average net contribution from 2012 to 2016 (£7.87 billion) does take receipts by private sector into account.

25 HM Treasury, “European Union Finances 2018: statement on the 2018 EU Budget and measures to counter fraud and financial mismanagement“ (June 2019). See for information on the UK’s net contribution the tables on pages 14 and 15.

26 See the vote on the MFF Regulation as recorded in Council document 10239/14.

27 Without prejudice to the provisions of the European Union (Withdrawal) (No 2) Act 2019, the legal default date for the UK’s departure from the EU—barring a mutual agreement with the European Council to the contrary—remains 31 October.

28 The Brexit guidelines issued by the remaining Member States meeting in the European Council in April 2017 called for “a single financial settlement [to] ensure that the Union and the United Kingdom both respect the obligations resulting from the whole period of the UK membership in the Union. The settlement should cover all commitments as well as liabilities, including contingent liabilities”. The European Commission subsequently issued a more detailed position paper setting out the EU’s position in June 2017, the first such paper published by the Commission’s Brexit task force.

29 Speech by the Rt Hon. Theresa May MP, “A new era of cooperation and partnership between the UK and the EU“ (22 September 2017).

30 This estimate will have decreased in size since, because of the extension of the Article 50 period until 31 October 2019 (during which the UK continues to make payments as a Member State, rather than as an ex-Member State under the terms of the financial settlement).

31 The financial settlement contained in the draft Withdrawal Agreement would also require the UK to pay for a share of the ‘Reste a Liquider’, the EU’s outstanding spending commitments made under the 2014–2020 MFF which would have not yet been paid by 31 December 2020, and to contribute towards other liabilities taken on during the UK’s EU membership (such as EU staff pensions).

32 House of Lords European Union Committee, Brexit and the EU budget, 15th Report of Session 2016–17 (4 March 2017).

33 The first Secretary of State for Exiting the EU (Rt Hon. David Davis MP) said in a Written Ministerial Statement on 13 July 2017 that “the Government recognises that the UK has [financial] obligations to the EU, and the EU obligations to the UK, that will survive the UK’s withdrawal—and that these need to be resolved”. In addition, in evidence to the House of Lords EU Committee on 29 August 2018, the then-Secretary of State for Exiting the EU (Rt Hon. Dominic Raab MP) said there was still a “question around quite what the shape of [the UK’s] financial obligations were” if the Withdrawal Agreement was not ratified, adding that the UK “always pays its dues”. On 6 February 2019, the Government again told Parliament that “even if the UK leaves without a deal, the Government have always been clear that the UK has obligations to the EU […] that will survive its withdrawal, and that these obligations would need to be resolved”.

35 Even though the Regulation was formally adopted in July, well after the UK agreed to an extension of the Article 50 period until 31 October, from a legal perspective the Council had to pass the Regulation in the exact form approved by the European Parliament on 17 April. As the Parliament had risen by that point for the 2019 EU elections, the substance of the legislation could not be altered except by Delegated Act after publication in the Official Journal.

36 Article 2(2) of the proposal for a Regulation establishes the UK contribution in 2020 would be calculated by taking the estimated gross contribution under the draft EU budget for 2020, and adjusting it to take into account the Union’s final spending plans under the adopted 2020 budget. More specifically, it involves the UK’s total estimated own resources contribution under the draft EU budget for 2020 (“UK OR DB2020”) as set out in table 7 of the of the revenue section, plus the UK’s GNI-based own resource contribution (“UK GNI key DB2020”) as set out in that same table divided by the total GNI own resource contribution of all Member States and multiplied by the difference between the EU’s payment appropriations under the finalised 2020 budget (“PA B2020”) as and when adopted, minus the EU’s payment appropriations under the draft 2020 budget (“PA DB2020”) originally proposed by the Commission. Although the final budget for 2020 has not yet been adopted, the Member States in the Council are seeking total payment appropriations amounting to €153,111,908,373 compared to the original Commission proposal of €153,620,722,889. Provisionally, using that Council proposal, the formula proposed by the Commission to calculate the UK’s total gross contribution in 2020 would therefore yield: €18,539,395,059 (estimated total UK contribution under the draft budget)—€77,339,806 (adjustment to take into account spending cuts proposed by the Council) = €18.46 billion (£16.5 billion).




Published: 22 October 2019