Brexit divorce bill and UK participation in EU programmes: how much and who pays? Contents

Summary

The UK left the European Union on 31 January 2020, but under the terms of the Withdrawal Agreement the Government and the EU have agreed to resolve certain legacy financial obligations vis-à-vis one another.

In particular, the UK will pay for a share of outstanding EU spending commitments made from programmes like the Regional Development Fund under its 2014–2020 “Multiannual Financial Framework” (its long-term budget). In return, the EU will honour any funding allocated from that budget to UK-based organisations, like universities, researchers, or local authorities, even though any remaining payments fall after the UK’s departure. In addition, the Government has agreed to pay for a share of the pension liabilities of EU officials accrued during its period of EU membership. The settlement has also seen the UK assume a partial responsibility for a share of contingent liabilities contained in the accounts of the EU and the European Investment Bank (EIB) that arose prior to Brexit, should these crystallise in the future. The UK will also receive back certain assets, in particular its €3.5 billion of paid-in capital with the EIB over a period of 12 years.

In addition to the settlement, which covers UK and EU financial obligations relating to the period of the UK’s membership of the European Union, the Government has separately reached a provisional agreement with the EU to continue participating in four EU funding programmes until 2027 under the new UK-EU Trade and Cooperation Agreement (TCA). This concerns Horizon Europe, the EU’s flagship research funding programme, as well as three other EU schemes related to satellite observation and nuclear research. This arrangement–strongly supported by the British scientific community - would require a further UK contribution to the EU budget, which is additional to any sums paid pursuant to the settlement in the Withdrawal Agreement. However, the UK’s participation remains to be formalised due to delays on the EU side in approving the necessary Protocols to the TCA, meaning these payments are not yet a certainty.

We retain a close interest in the issue of UK payments to the EU post-Brexit. The aim of this Report is to inform the House and any other interested parties about: (1) the state of implementation of the settlement; and (2) the UK’s continued participation in EU programmes, and to assess the potential costs to the UK Exchequer. Information on these issues has not to date been collated in one place. In particular, we believe it is important to provide comprehensive information on the potential cost of these arrangements to the UK taxpayer, likely to run into tens of billions of pounds; the significant discrepancies in the estimates of the total cost of the Brexit settlement made by the Treasury, the Office for Budget Responsibility and the European Commission respectively; and the continued uncertainty about the UK’s contributions to, and receipts from, EU research funding programmes under the new post-Brexit relationship.

The financial settlement set out in the Withdrawal Agreement in particular translates into a significant net transfer from the UK to the EU. However, its total cost is not fixed. It will only become clear over time, as payments fall due over the coming decades using a complex methodology established in the Withdrawal Agreement. In July 2021, the Treasury released its latest forecast for the overall cost of the Brexit settlement since the UK left the EU on 31 January 2020, estimating a net cost to the UK of £30.4 billion. This compares to an estimate of £34.1 billion made by the Office for Budget Responsibility (OBR) in March 2021. The OBR (and, separately, the European Commission) have, notably, estimated the overall cost of the UK’s share of the EU’s pre-Brexit pension liabilities to be significantly higher compared to the Treasury’s forecast. Neither the Government nor the OBR currently foresee the UK having to pay any meaningful amounts towards the EU and EIB contingent liabilities to which the Exchequer is exposed under the terms of the financial settlement.

The total size of the settlement could also be affected by two on-going disagreements between the Government and the EU. The first of these relates to whether the UK should have to pay for a share of a Covid-related amendment to the EU budget in 2020, which allowed the EU to spend an additional €2 billion (£1.7 billion) on pandemic-related measures. Technical talks are on-going to determine whether the UK will need to make a contribution towards that EU spending. The second matter concerns a legal case against the UK by the European Commission before the EU Court of Justice, by means of which the Commission is seeking to force the Government to make a retrospective payment of more than €3.8 billion (£3.3 billion) to the EU budget. The case was triggered by an alleged failure by HM Revenue and Customs to address customs fraud on Chinese textile imports at UK ports between 2011 and 2017, which the Commission argues resulted in a substantial evasion of customs duties (which, under EU law, should have been paid into the EU budget). The Court has not yet set a date for delivery of its judgement, and the financial implications of the case for the UK taxpayer therefore remain unclear.

As regards the cost of continued participation by the UK in EU programmes as envisaged by the Trade and Cooperation Agreement, no comprehensive estimate appears to have been published by the Government. However, the Department for Business, Energy and Industrial Strategy has forecast that the UK’s gross contribution to ‘Horizon Europe’ alone–the largest of the four schemes in which the UK wants to continue participating - could be £15 billion over the next seven years, before receipts from the programme flowing back to British universities and other recipients are taken into account. The combined UK contribution to the other three EU programmes in which it is seeking participation is likely to be a fraction of that amount, as they are much smaller financially. However, the delay in formalising the UK’s participation under the TCA could raise potential concerns about value for money, because the opportunities for EU-funded grants and procurement agreements from which British organisations are excluded at present will be definitively lost, reducing potential receipts from these programmes flowing back to the UK in return for the Government’s financial contribution.

Once continued UK participation in the EU programmes is finalised, taking its obligations under the Withdrawal Agreement and the TCA combined, the Government is likely to make gross payments to the EU budget exceeding £2 billion per year for the foreseeable future. However, the amount will decrease as the Brexit financial settlement is gradually paid off and the UK’s contributions begin to relate solely to those EU programmes in which it has chosen to seek continued participation as a non-Member State. We will closely monitor the resolution of the UK’s financial obligations to the EU under the Withdrawal Agreement, and the costs and benefits of its continued involvement in certain EU programmes under the new relationship.




Published: 25 October 2021 Site information    Accessibility statement