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

1The financial settlement in the Withdrawal Agreement

Introduction

1.The UK left the European Union on 31 January 2020. Under Part Five of the Withdrawal Agreement governing the UK’s exit, the EU and the UK are required to make certain payments to each other beyond the date the UK formally withdrew from the EU.1 The purpose of this ‘Brexit settlement’ is for the two parties to resolve their residual financial obligations to each other linked to the period of the UK’s membership from 1973 until 2020.2 Two fundamental principles are that the UK will not finance any commitments that it would not have funded if it had remained a Member State, and that it will receive a share of any financial benefits that would have fallen to it had it remained part of the EU.

2.The settlement, like the UK’s payments into the EU budget as a Member State, has been politically controversial.3 However, Phillip Hammond, Chancellor of the Exchequer at the time the settlement was negotiated in 2017–18, has stated on the record that the Treasury “had pretty clear legal advice about what our obligations were” and that the Government was “going to have a commitment for quite a lot of money here [because] we’re liable for it”.4 As such, the fact there would be a settlement “wasn’t a big thing from the Treasury’s point of view”, although Mr. Hammond admits that “handling it in public [and] how we presented it in public was a massive thing”.5 He also suggests the UK’s own view of its liabilities was reflected in the Withdrawal Agreement because the EU “didn’t really try and push us with any vigour to go beyond that [UK] position”.6

3.While the settlement technically involves payments in both directions, the overall result of the chosen approach is a significant net transfer from the UK to the EU (estimated by the Treasury in July 2021 to amount to £30.1 billion, as we discuss in more detail below). However, it is important to note that the Withdrawal Agreement does not definitively fix the overall cost of the settlement: rather, it sets out a methodology for establishing the UK’s contributions to and receipts from the EU.

The methodology for calculating payments under the financial settlement

4.The EU’s financial obligations ‘undertaken’ during the UK’s membership from 1973 until 2020, and for which the Treasury has assumed partial liability under the terms of the Withdrawal Agreement, are multifaceted and complex. They could not be definitively established at the point of the UK’s formal withdrawal from the European Union on 31 January 2020, and the precise cost of the settlement is therefore not explicitly set out in the Agreement. Instead, it establishes a methodology for calculating the size of payments the UK must make to the EU and vice versa, centred around five different components. This forms the basis on which the Government will be invoiced for payments to the EU twice a year, until all residual obligations as set out in the settlement are extinguished.7

5.In summary, the key components of the financial settlement in the Withdrawal Agreement are as follows:

6.As part of the financial settlement, given that the UK is honouring its share of contributions to the 2014–2020 Multiannual Financial Framework, the UK remain eligible to participate in EU programmes–such as the ‘Horizon 2020’ research programme or the Regional Development Fund–under that EU long-term budget until their closure. In essence, this means UK-based organisations and individuals will continue to receive any EU funding granted from those schemes before the end of 2020 (even if the money is only paid out in 2021 or later).22 However, the UK’s participation in EU funding programmes from 1 January 2021 onwards under the new UK-EU Trade and Cooperation Agreement (TCA) is much more limited, as set out in chapter 2 of this Report.

7.The size of the UK’s payments under the different components of the settlement from 1 January 2021 onwards will, generally speaking, be calculated based on its average share of contributions to the EU budget over the 2014–2020 period (therefore taking into account the effect of the UK rebate in reducing its annual payments to the EU).23 The European Commission currently estimates this share to be approximately 12.4%.24 This means, for example, that if the EU’s total pension liability to which the UK must contribute were - hypothetically speaking - €100 billion, the UK’s share would be €12.4 billion. A definitive calculation of the UK’s share will take place in 2022.25

8.The Treasury made the final payment in respect of the UK’s period of membership of the EU in February 2021.26 Payments after this point have been, and will be, made in accordance with the methodology set out in the Withdrawal Agreement as described above. In practical terms, the EU will issue two invoices per year, in April and September, with UK payments due in monthly installments thereafter.27 The first such request for payment of the UK’s outstanding net liabilities was made on 16 April 2021, amounting to €3.8 billion (£3.2 billion) payable in equal installments over the subsequent four months.28 As of 1 April 2021, payments are made by the Treasury under authorisation from Parliament via the annual Estimates process, with the exception of those relating to the EU’s “traditional own resources”, namely the payment into the EU budget of the majority of customs duties collected by the UK on the EU’s behalf before the end of 2020.29

9.In the following section, we look more closely at some of the recent estimates of the total net cost of the financial settlement to the UK taxpayer.

Estimates for the total cost of the financial settlement to the UK

10.As a result of the methodology chosen to establish the settlement, its net cost to the UK taxpayer will be dependent on various factors and cannot yet be definitively established.

11.In particular, the size of the EU’s financial obligations for which the UK is partially liable under the Withdrawal Agreement is still unknown30 (with the largest uncertainty relating to the eventual cost of the pension liability for EU staff accrued by 31 December 2020, which is dependent on complex actuarial calculations and stretches many decades into the future).31 In addition, the EU made significant Covid-related changes to its 2020 budget, and the UK is subject to a legal case before the Court of Justice of the EU relating to alleged underpayment of its contributions to the EU budget between 2011 and 2017. The effect of these matters on the size of the UK’s obligations under the settlement is unclear (as discussed further below). The net cost will also be affected by the amount of money the Government and private sector organisations ultimately receive back in receipts from the EU budget.32 Lastly, as the settlement is denominated in Euros, it is vulnerable to fluctuations in the Sterling-Euro exchange rate.

12.The outline of the financial settlement was provisionally agreed between the Government and the European Commission in December 2017, pending formal ratification of the Withdrawal Agreement.33 The following month, the Treasury published its initial assessment of the cost of the settlement to the UK.34 This contained the now-famous estimate of a £39 billion net cost to the Exchequer, the upper end of a £35–39 billion range based on the prevailing Euro-Sterling exchange rate at the time.35 Since then, the Withdrawal Agreement has been ratified and various other developments have taken place that affect the size of the settlement. In particular, the Treasury’s initial estimate was predicated on the UK leaving the EU on 29 March 2019 (exactly two years after the Brexit process under Article 50 of the Treaty on European Union was initiated). The UK’s membership of the EU was subsequently extended a number of times under Article 50 TEU, and consequently it only formally left the EU on 31 January 2020. From an accounting perspective, this had a significant impact on the size of the financial settlement, because it meant that the Treasury paid more ‘regular’ EU budget contributions while the UK remained a Member State, with this money consequently not needing to be paid post-Brexit as part of the settlement as expected by the Treasury in its initial estimate in 2018.36

13.Between the UK’s exit on 31 January 2020 and the end of the transition period on 31 December that year, the UK made gross contributions to the EU budget totalling €17.2 billion (£14.7 billion), offset by receipts totalling €6 billion (£5.4 billion) to result in a net contribution of £9.3 billion during that period. As noted, the EU issued the UK with a first request for payment under the settlement since the end of the post-Brexit transition period–amounting to £3.2 billion–in April 2021.37 For the totality 2021, the European Commission estimates that gross UK payments will amount to €6.8 billion.38

14.However, these payments only represent a fraction of the total settlement. Between March and July 2021, the European Commission, the Treasury and the OBR also each published their most recent estimates of the overall cost of the financial settlement to the UK over its entire lifetime. The most detailed and comprehensive estimate of the three was set out in the Treasury’s annual European Union Finances Statement.39 The headline figures presented by each of these institutions are shown below:

Institution

HM Treasury

OBR

European Commission

Estimated cost of the settlement to the UK

€43.8 billion

(£37.3 billion)40

€38.5 billion

(£34.1 billion)41

€47.5 billion

(£40.4 billion)42

Comparison of the estimates produced by the Treasury, OBR and European Commission

15.There are clearly significant differences between these estimates, with the Treasury landing halfway in the middle between the OBR on the lower end and the Commission on the higher end. However, it is important to note that there are a number of accounting differences between the approaches underlying these forecasts, which means that they cannot actually be compared like-for-like.

16.First, the European Commission’s estimate is for direct transfers between the EU and the UK Exchequer only: unlike the Treasury and OBR forecasts, it omits receipts from EU funding programmes under the Multiannual Financial Framework 2014–2020 that will continue to flow to UK-based recipients such as universities and researchers until the closure of those programmes. Unlike the OBR and Treasury, the Commission also does not include the repayment of the UK’s €3.5 billion of paid-in capital by the EIB (not because it disputes this transfer but because it is, legally speaking, separate from the EU budget for which the Commission is responsible). In combination, these factors produce a Commission estimate that is significantly higher than those of the Treasury and OBR. This is offset somewhat by the fact that the Commission figure relates only to UK payments from 1 January 2021, which marked the end of the post-Brexit transition period. By contrast, the Treasury and OBR both include payments and receipts from 1 February 2020 onwards, namely from the start of that transition period.

17.Second, the Treasury headline figure of £37.2 billion also includes money paid and received by the UK while it was still a Member State of the EU, from 29 March 2019 to 31 January 2020. This is to enable a like-for-like comparison with its initial £39 billion estimate for the settlement made in January 2018, when the UK was still scheduled to leave the EU on 29 March 2019. This approach adds a net UK contribution of €7.8 billion to the Treasury’s overall estimate, even though that sum formed the UK’s routine contributions as an EU Member State. It was not therefore part of the financial settlement (which only took effect when the UK ceased to be a Member State on 31 January 2020). Neither the Commission nor the OBR include this amount in their estimates, since it was paid before the UK left the EU.

18.An added complexity is that while the Treasury has published both gross and net figures relating to the various components of the settlement (namely gross UK contributions to and receipts from the EU budget, and the resulting net UK contribution), the OBR estimates mostly relate to the net amounts only without disclosing its estimates of the underlying gross amounts of UK and EU payments respectively, and the Commission figure–as noted–mostly ignores UK receipts from the EU budget altogether, therefore not giving a net figure.

19.In summary, the headline figures used by the Commission, Treasury and OBR–aside from any other discrepancies–all refer to UK payments (and, for the Treasury and OBR, receipts) over different stretches of time, complicating their comparability. The table below shows the different periods for which UK contributions to and receipts from the EU budget are included in the headline estimates referred to above.

HM Treasury

OBR

European Commission

UK payments to the EU prior to 29 March 2019

No

No

No

UK receipts from the EU prior to 29 March 2019

No

No

No

UK payments to the EU from 30 March 2019 to 31 January 2020

Yes

No

No

UK receipts from the EU from 30 March 2019 to 31 January 2020

Yes

No

No

UK payments to the EU from 1 February 2020 to 31 December 2020

Yes

Yes

No

UK receipts from the EU from February 2020 to 31 December 2020

Yes

Yes

No

UK payments to the EU since 1 January 2021

Yes

Yes

Yes

UK receipts from the EU since 1 January 2021

Yes

Yes

No43

20.With the above in mind, we have looked at the detailed estimates produced by the three institutions for the different components of the settlement in an attempt to make their forecasts comparable. When adjustments are made to reflect what is included and what is not in the different forecasts, the Treasury’s estimate for the different components of the settlement compares to the Commission and OBR estimates as shown below.44 The figures in bold denote overall size of the settlement as forecast by the Treasury, OBR and Commission respectively, indicating how they are not directly comparable.

Component of the settlement

HM Treasury45

OBR46

Commission47

Payments from the UK to the EU budget after 31 December 2020

1. Gross UK contributions to outstanding EU spending commitments (RAL)

€34 billion

(£29 billion)

N/a

€35 billion

(£29.8 billion)

2. UK receipts from the EU budget after 31 December 2020

-€10.8 billion

(-£9.2 billion)

N/a

N/a

3. Net UK contributions to outstanding EU spending commitments (RAL)

€23.2 billion

(£19.8 billion)

€22.1 billion

(£18.9 billion)

N/a

4. UK guarantee for EU contingent liabilities

Considered unlikely to crystallise. No cost to the UK forecast.

Payments relating to the UK’s share of EU assets and liabilities after 31 December 2020

5. UK share of relevant assets

-€4.9 billion

(-£4.1 billion)

N/a

-€1.8 billion

(-£1.5 billion)

6. UK contribution to EU pension liabilities

€9.8 billion

(£8.5 billion)

€13.4 billion

(£11.9 billion)

€14.3 billion

(£12.2 billion)

7. Net UK contribution to EU liabilities after receipt of EU assets

€5 billion

(£4.3 billion)

€6 billion

(£5.1 billion)

N/a

Net total of components 1,4–6 (Commission headline estimate)

€38.9 billion

(£33.1 billion)

N/a

€47.5 billion

(£40.4 billion)

This is the full estimate for the settlement in the Commission’s forecast

Payments from the UK to the EU budget between 31 January 2020 and 31 December 2020

8. Gross UK contributions to the EU budget during the transition period

€17.2 billion

(£14.7 billion)

N/a

N/a

9. UK receipts from the EU budget during the transition period

-€6 billion

(-£5.4 billion)

N/a

N/a

10. Net UK contributions to the EU budget during the transition period

€11.2 billion

(£9.3 billion)

€11.8 billion

(£10.1 billion)

N/a

Payments relating to the European Investment Bank

11. Repayment of the UK’s paid-in capital with the EIB

-€3.5 billion

(-£3.1 billion)

-€3.5 billion

(-£3.1 billion)

N/a48

12. UK guarantee for EIB contingent liabilities

Considered unlikely to crystallise. No cost to the UK forecast.

Net total of components 3, 4, 7, 10–12

(OBR headline estimate)

€35.9 billion

(£30.4 billion)

38.5 billion

(£34.1 billion)

This is the full estimate for the settlement in the OBR forecast

N/a

Payments during the extended Article 50 period (April 2019–January 2020)49

13. Net UK contribution to the EU budget during the Article 50 extension

€7.8 billion

(£6.9 billion)

N/a

N/a

Net total of components 3, 4, 7, 10–13 (HMT headline estimate)

€43.8 billion

(£37.3 billion)

This is the full estimate for the settlement in the Treasury’s forecast

N/a

N/a

21.As can be seen, when the UK’s payments made before it actually left the EU (component 13 in the table) are stripped out from the Treasury’s figures, its estimate for the net cost of the settlement (£30.4 billion) now appears substantially lower than the comparable forecast produced the OBR (£34.1 billion). The European Commission has only produced a gross figure for the cost of the settlement to the UK, which makes overall comparisons difficult.

22.However, there is one component of the settlement for which all three bodies have produced their own forecast of the cost to the UK where there is a clear divergence in their respective estimates: the UK’s share of the EU’s pensions liabilities accrued prior to the end of 2020. The Treasury estimates this represents a gross cost of €9.8 billion (£8.4 billion), whereas the OBR puts the figure at €13.4 billion (£11.5 billion), resulting in a €3.6 billion (£3.1 billion) difference. The Treasury’s EU Finances Statement for 2020 explains the sizable difference between its estimate and that of the OBR (and, by extension, the Commission) as follows:

The OBR does not discount any aspect of the financial settlement. The OBR forecast future public expenditure flows from the financial settlement as they would in their fiscal forecast. In contrast, and in line with the 2017 reasonable central estimate, the Treasury’s estimate continues to use a discounted valuation of the UK’s EU pensions liability. The effect of discounting this liability is significant because the future cash flows are spread over many decades into the future. The Withdrawal Agreement provides the option for the UK to settle pension obligations early (if the UK so chooses), based upon a discounted amount.50

23.The reference to ‘discounting’ aspects of the financial settlement here refers to calculations made by the Treasury to adjust the UK’s share of the EU’s pensions bill to expected future actuarial developments.51 In particular, the Commission notes in the EU’s most recent accounts that “in 2020 the real discount rate was negative for the second year running”. The discount rate is the rate used to value the current cost of future pension obligations. In actuarial terms, a negative rate means that “any given amount is worth more today than in the future”, which “significantly increases the size of the [pensions] liability at year-end”. As a result, the EU accounts for 2020 recorded the estimated net present value of the pensions liability as €116 billion.52 This is up from €97.7 billion in 2019, €80.5 billion in 2018 and €73.1 billion in 2017.

24.Due to the complexity of the underlying actuarial calculations, the amount contained in the Commission accounts should not be taken as the definitive size of the liability and the UK’s share thereof. Indeed, unlike the OBR and Commission, the Treasury’s estimate of the pension costs attempts to strip out the effects of the “historically low current net discount rate” to forecast a lower actual cost of the EU pensions bill (at €9.8 billion).53 By contrast, the European Commission and the OBR appear to have applied the UK’s share under the settlement–approximately 12.4 per cent–directly to the current value of the pensions liability, without any further adjustments. Aside from the divergence in the expected cost of the pensions liability, the Treasury has said that its forecast being lower than the OBR’s results from the use of non-public data for its modelling for the cost of the Reste à Liquider (see paragraph 5), and a different approach to the applicable exchange rate over the lifetime of the settlement (where the OBR forecasts what the Euro-Sterling rate might be in the future).

25.The Government does not appear to have formally commented on the European Commission’s estimate that the settlement will be a net cost to the UK of €47.5 billion. However, the Prime Minister has said the UK does “not recognise that figure” (not least, presumably, because of the difference in approaches to estimating the cost of the settlement as described above, which means the Treasury and the Commission are not in fact referring to the exact same set of payments and receipts in both directions).54 On the assets side, part of the discrepancy between the figures produced by the Commission on the one hand, and the Treasury and OBR on the other, is that the latter appear to have a much longer forecast horizon for the amount the UK is due to receive back from various EU financial instruments (component 5 in the table above).55

26.In addition, all three headline estimates for the cost of the settlement omit the UK’s contributions to the EU’s “off-budget” programmes like the European Development Funds, which the Treasury has separately forecast will cost the UK an additional €2.3 billion (£2 billion). This is because these payments are not made into the EU budget, but to funds managed separately by the European Commission on behalf of the EU’s Member States. Similarly, none of the estimates published to date envisage the UK incurring any actual costs from being liable for a share of the pre-Brexit contingent liabilities of the EU and the EIB, which we discuss further below.

27.According to the Office for Budget Responsibility (OBR), the majority of the settlement is likely to have been paid by the mid-2020s, with UK payments under the settlement dipping below £1 billion per year from 2026 onwards and levelling off at around £300 million annually from that point.56

28.The European Union Finances Statement published by the Treasury is an invaluable tool in assessing the fiscal implications of the financial settlement included in the Withdrawal Agreement. We welcome the level of detail it provides on the different financial aspects of the UK’s exit from the EU. We note that the Treasury’s most recent forecast for the cost of the settlement, once payments made by the UK during the unforeseen extension of its EU membership from March 2019 to January 2020 are taken into account, falls within the range of its original estimate made in January 2018.

29.We recommend that the Treasury make clear when publishing any future estimates of the total net cost of the settlement whether the amount includes payments made before the UK left the EU, since this may invite erroneous comparisons with the annual estimate published by the OBR (which, in our view reasonably, only includes payments made after the UK formally withdrew and the financial settlement as set out in the Withdrawal Agreement took effect). This is likely to be confusing to those without detailed knowledge of the methodology of the settlement and the different accounting approaches taken by the Treasury and the OBR when estimating its cost. The approach underlying the estimated cost of the settlement produced by the European Commission in the EU’s accounts for 2020 is so different from those forecasts, by omitting a number of components of the settlement, so as to preclude meaningful comparison.

30.It is nevertheless concerning that there is a significant discrepancy in the valuation of the UK’s total contribution to EU pension costs under the settlement between the Treasury on the one hand, and the OBR and the European Commission on the other. This is an issue that will require careful attention as payments under the settlement fall due. Having taken note of the Treasury’s explanation of the multi-billion pound difference between its estimate and that of the OBR with respect to the pensions liability, we ask the Government to keep Parliament informed of any significant fluctuations in the estimated size of the UK’s liability in that respect and, where relevant, if the Government decides to settle the amount early in full in line with the terms of the Withdrawal Agreement.

Potential UK payments relating to EU and EIB contingent liabilities

31.One of the components of the financial settlement in the Withdrawal Agreement relates to the UK’s exposure to certain contingent liabilities on the books of the EU and the European Investment Bank (EIB), principally those that were entered into the accounts before the UK ceased to be a Member State on 31 January 2020.57 The underlying logic is that these liabilities were entered into while the UK was part of the EU, and therefore–in part–on its behalf, and that it should therefore also pay towards a share of any costs these may generate in the future even though it is no longer a Member State.

32.These liabilities, as the term implies, are different from the other elements because the UK will only be required to pay for a share of them if they actually crystallise. If this does not happen, there would be no UK contribution required. Indeed, in relation to some of the potential liabilities recorded in the EU’s accounts, the European Commission has already set money aside–’provisioned’–in so-called ‘guarantee funds’, to avoid or mitigate the impact on planned EU spending if they do crystallise. Where this is the case, the UK will receive back its share of any unused portion of these funds when the underlying liability has fully amortised, as part of the return of EU assets to the UK. Indeed, a small amount has already been returned to the UK this year for that reason.58

33.The contingent liabilities covered by this part of the Brexit financial settlement as regards the EU’s accounts include, in particular:

34.The European Commission has estimated that the UK’s share of the EU’s contingent liabilities covered by the financial settlement amounted to €12.9 billion (£11 billion) at the end of 2020.62 However, as noted, no UK contribution is due unless the obligation crystallises in the future, and even then only where no sufficient guarantee funds are in place. In the EU’s annual accounts for 2020, the Commission says “this is considered unlikely”. The Treasury similarly takes the view that the possibility of an “outflow of resources” (i.e. the UK having to pay the EU) in relation to these contingent liabilities is “remote”. Indeed, in July 2021, it estimated this arrangement should result in a €2.1 billion (£1.8 billion) asset for the UK over the lifetime of the settlement, because of the return of previous UK contributions to various EU guarantee funds,63 reducing overall cost of the settlement to the taxpayer.

Potential UK payments relating to European Investment Bank operations

35.In addition to potential payments and receipts relating to contingent liabilities and their guarantee funds in the EU accounts, the settlement also exposes the UK to certain contingent liabilities related to the financial activities of the European Investment Bank (EIB).

36.These contingent liabilities are dealt with separately in the Withdrawal Agreement because the EIB–while established under the EU Treaties and operated on the EU’s behalf - is an independent legal entity, with its own accounts. Its fundamental objective is to provide lending to EU Member States (and, to a lesser extent, non-EU countries) for their economic development: in its Annual Report of May 2021, the Bank reported outstanding borrowing operations amounting to €435 billion (£370 billion).64 The EIB is funded through a mix of paid-in capital by the EU Member States (which are its only shareholders) and raising its own funds on the capital markets. While the Member States have a legal obligation to provide a full amount known as their ‘subscribed capital’ to the Bank, in practice only a small amount–8.9 per cent–is actually paid to the EIB in the form of ‘paid-in capital’. The difference is termed ‘callable capital’, which EU countries may be asked to pay “to such extent as may be required for the Bank to meet its obligation”.65

37.The UK ceased to be a shareholder in the EIB when it left the EU. At that point it became largely ineligible for new investments by the Bank, and–as noted–the Treasury is receiving back the UK’s €3.5 billion in paid-in capital in 12 annual installments. UK lending operations approved by the EIB group before Brexit remain unaffected.66 In addition, the Withdrawal Agreement states that the UK is responsible for a share of certain contingent liabilities of the EIB, primarily in relation to the latter’s financial operations–such as loans and investments - approved before the UK’s withdrawal on 31 January 2020.67 This reflects the fact that these operations–which may result in a loss to the Bank - were undertaken while the UK was a shareholder of the EIB. The effect of this provision is that the UK could be required to inject capital into the European Investment Bank if considered necessary in light of the Bank’s “payment obligations, the state of its assets and liabilities [or] its standing in capital markets”.68 A decision to make such a capital call that includes the UK would be made by the Board of Directors of the EIB, namely senior officials of the Finance Ministries of the 27 EU Member States, without UK Government input.69

38.Some concerns have been expressed that the economic damage caused by the Coronavirus pandemic may jeopardise the financial position of the EIB to an extent that it might require a capital injection by the UK under the terms of the settlement. However, it is important to note that the EIB’s ability to require additional capital at the expense of the British taxpayer are curtailed by three important legal safeguards in the Withdrawal Agreement:

First, as noted, the UK’s guarantee to the EIB cannot be called on in relation to the latter’s financial operations that were agreed only after the UK left the EU on 31 January 2020.70 It is for this reason that the UK is not contributing to, liable for or eligible to participate in the EIB’s new €25 billion ‘Pan-European Guarantee Fund’ established in summer 2020 to help businesses struggling because of coronavirus;

Second, the Withdrawal Agreement caps the maximum amount the UK could ever be asked to contribute to the EIB’s capital and that amount will decrease over time. The settlement prevents the sums to be paid, if the conditions for the UK guarantee are met, from ever exceeding the value of the UK’s subscribed capital with the Bank when it ceased to be a Member State, which amounted to €39.2 billion (£35.2 billion).71 Moreover, in the longer term, the maximum value of the guarantee will automatically decrease over time as the EIB’s outstanding operations predating the UK’s withdrawal from the EU amortise and drop below that amount, eventually reaching zero (at which point the contingent liability is extinguished);72 and

Third, the EIB cannot make a capital call on the UK without also making a similar call on the remaining EU Member States. The Bank could therefore not seek to boost its financial position at the expense of the UK while not requiring a capital contribution from the EU Member States themselves.

39.In addition, the European Investment Bank has other means at its disposal before it makes a capital call on the UK and the remaining 27 Member States, for example by drawing on its accumulated financial reserves. While concerns have been expressed about the impact of the Coronavirus on the financial stability of the EIB (which could make it more likely that it needs a cash injection, and therefore that the UK’s guarantee could be called on), the Bank’s 2021 Annual Report states:

The quality of the Bank’s loan portfolio remains high, despite the pandemic’s impact […], as it relies on a risk management strategy based on adequate levels of security and guarantees, as well as standard protective clauses included in its loan agreements. […] The overall loan portfolio continued to perform well, with only 0.4% impaired loans at end-2020 […]. The portion of payments overdue by more than 90 days remains very low, totalling €117.1m at end-2020 […] and representing only 0.03% of the risk portfolio. […] Conservative risk management policies and thorough project due diligence underpin the Bank’s credit standing. Despite the crisis, the EIB generated positive financial results, booking an annual surplus of €1.7 billion for 2020 as compared to €2.4 billion in 2019.73

40.As a result, the Treasury in its latest EU Finances Statement of July 2021 still refers to the UK’s contingent liabilities under the settlement–including the EIB guarantee - as ‘remote’ within the 2019–20 accounts of the Consolidated Fund,74 and accordingly does not currently forecast any cost to the taxpayer associated with them.75 The estimates produced by the OBR also do not assume any of the EIB contingent liabilities to which the UK is exposed under the financial settlement will crystallise in a meaningful way.76

41.Given its size, the contingent liabilities taken on by the UK under the financial settlement–especially those in respect of the European Investment Bank - will continue to be of concern, even if there is no indication at present that the either the EU or the EIB will require payment from the UK as a result of them crystallising. The Committee will continue to monitor any relevant developments in this regard closely. We ask the Government to be proactive in informing Parliament if any developments occur that undermine these contingent liabilities’ current classification as remote.

Impact of the EU’s emergency Covid-19 budget on the cost of the settlement

42.As is clear from the preceding section, the largest component of the financial settlement is the UK’s contribution to the spending commitments made by the EU from its funding programmes (such as the Cohesion Fund and the Regional Development Fund) before 31 December 2020, but which were yet to be fully paid out on that date. The totality of EU unpaid funding committed to recipients, the ‘Reste à Liquider’ or RAL, at the end of 2020 totalled €303.2 billion (£260 billion), of which the UK is liable for a share of approximately 12.4% (£29 billion).77

43.The total amount of such spending commitments the EU could make before the end of 2020, and by extension the maximum size of the RAL to which the UK is required to contribute under the settlement, was capped by the EU’s Multiannual Financial Framework.78 This ‘MFF’ is the EU’s long-term budget, which sets spending limits for different areas of EU activity for seven-year period. The last to be established while the UK was a Member State was the iteration for the 2014–2020 period, agreed by all EU countries in 2013.79

44.Because the MFF can be amended mid-way through the EU’s budgetary cycle, but the UK lost its ability to veto any such changes after 31 January 2020, the Withdrawal Agreement contains specific provisions that protect the Treasury from having to pay towards funding commitments in 2020 that are predicated on an increase in the EU’s spending limits agreed after the UK ceased to be a Member State.80 This safeguard has had practical consequences in the context of the Coronavirus pandemic, which led the EU to adjust its spending plans for 2020 significantly through seven ‘amending budgets’ and depletion of its financial reserves for that year.

45.However, in one particular instance a difference in interpretation of the extent of the UK’s legal safeguards against retrospective increases in the cost of the settlement via changes to the EU’s long-term budget has arisen. In April 2020, the 27 remaining Member States formally, and unanimously, approved an amendment to the EU’s 2014–2020 Multiannual Financial Framework.81 This modified an EU financial reserve - namely, a source of funding for unforeseen expenditure - known as the ‘Global Margin for Commitments’. In essence, the change allowed the EU to commit an additional €2 billion (£1.7 billion) in funding in 2020 for healthcare-related purposes in the context of the pandemic. Prior to the amendment, this money could only have been used for “policy objectives related to growth and employment, in particular youth employment, and to migration and security”. The bulk of this new money was subsequently used for collective, EU-wide Advance Purchase Agreements for a (then) future Coronavirus vaccine, a scheme in which the Government decided not to participate.

46.The EU has asserted that the UK should pay for a share of this additional €2 billion of EU spending under the financial settlement–irrespective of whether it participated in the vaccine purchase scheme - because the amendment to its long-term budget agreed after the UK’s withdrawal was “limited to the purpose” of the Global Margin for Commitments. In other words, the EU argues that it could have decided to spend the additional money anyway without the Covid-related legal modification, even if only for a more limited range of public policy purposes, and therefore any such expenditure is covered by the UK’s requirement to pay for a share of the EU’s spending committed before the end of 2020. Based on the UK’s 12.4% share as established under the settlement (see above), if it had to contribute to this additional spending the UK’s gross contribution would appear to be approximately €248 million (£213 million).

47.When the Chief Secretary to the Treasury (Steve Barclay MP) submitted an Explanatory Memorandum to us on these changes in May 2020, he did not indicate whether the Government accepted the EU’s assertion and, by implication, the obligation for the UK to pay towards this increased EU expenditure.82 We therefore specifically asked the Minister to clarify the Government’s position.83

48.However, on 4 June 2020 - before we had received the Minister’s reply - it became clear from press reports that the Government did not in fact agree with the EU’s interpretation of the UK’s obligations under the financial settlement to pay for a share of the €2 billion of additional EU spending using the amended Global Margin for Commitments. The Treasury’s latest EU Finances Statement of July 2021 notes that “the Government continues to hold technical discussions with the European Commission” on this matter. As such, it is not yet clear whether the UK will be required to pay for a share of the EU’s additional €2 billion of Covid-related spending in 2020. The issue could, as a last resort, be referred for a binding ruling by an independent arbitration panel under the dispute resolution procedures set out in the Withdrawal Agreement (potentially also involving the EU Court of Justice if it requires interpretation of EU budgetary law).

49.The Government rightly negotiated important safeguards as part of the Brexit financial settlement that prevent the UK from having to contribute to increases in EU spending in 2020 that were agreed only after it ceased to be a Member State. However, discussions on the question of whether the UK must contribute towards €2 billion of additional Covid-related EU spending, unlocked by means of an amendment to the 2014–2020 Multiannual Financial Framework, have been on-going for over a year and appear unresolved. We therefore ask the Treasury to clarify the amount for which the UK is would be liable if the EU’s interpretation were to prevail, what progress has been made in resolving the matter, and whether either side has indicated that a formal dispute resolution process may be necessary to resolve the issue.

Potential retrospective UK contributions to the EU budget due to customs fraud

50.In March 2017, the European Commission made public serious allegations84 that HMRC failed to collect €2.7 billion (£2.4 billion) in customs duties on Chinese textile imports between 2011 and 2017, by failing to take action against importers declaring such goods at fraudulently low values and therefore reducing the amount of duty paid. According to the Commission, €2.1bn (£1.9bn) of these alleged missing revenues should have been paid into the EU budget85 (which is part-funded by the import duty collected by its Member States, which the UK was at the time of the reported failings).86 It also argues that the UK infringed EU rules on suspension of VAT on such imports, leading to significant tax evasion in other EU countries where the goods were eventually sold on the black market without VAT paid.

51.Having failed to resolve the dispute at political level with the Government, in March 2019 the Commission formally initiated legal proceedings against the UK before the Court of Justice of the EU (CJEU) for alleged breaches of EU customs, VAT and budgetary legislation.87 In particular, it alleges that the UK failed to pay the €2.1bn in missing customs duties into the EU budget, and must therefore pay them retrospectively. To this amount, the Commission under EU law would have to add an additional sum–estimated at €1.7 billion (£1.5 billion) in the EU’s accounts for 202088–in interest for the UK to pay on the late payment.89 Under the terms of the financial settlement, the UK was required to make its contributions to the EU budget until the end of 2020 as if it were still a Member State, and it can be required to remedy any breaches of the applicable EU budgetary legislation committed before that point.90 For this reason, the EU Court of Justice retains jurisdiction in infringement proceedings against the UK in relation to alleged infractions of EU budget law committed before the end of the post-Brexit transition period on 31 December 2020. Any judgment by the Court that the UK had failed to apply the EU legislation cited by the Commission in its claim would therefore be legally binding on the UK.

52.The Government rejects both the allegation that it improperly implemented EU budgetary, customs and VAT law and, consequently, the Commission’s estimate of duty loss to the EU budget (and claim for interest for late payment). However, it has not denied the fact that - potentially widespread -undervaluation fraud did occur at UK ports during the period in question. It has asked the Court to dismiss the Commission’s case in its entirety, meaning no retrospective UK contribution to the EU budget would be needed. The Court heard arguments in the case from both sides at a hearing on 8 December 2020, and Advocate-General Priit Pikamäe, a senior legal advisor to the EU Court, delivered his Opinion (non-binding legal advice to the judges) on 9 September 2021.91 In his Opinion, the Advocate-General largely sided with the European Commission, arguing that the UK did indeed breach EU budgetary and customs law by not addressing customs fraud and subsequently paying fewer customs duties into the EU budget. However, he refused to endorse the Commission’s calculation of the revenue losses to the EU - the €2.1 billion referred to above - that the UK would have to make up retrospectively.

53.The Court has not yet announced a date for its judgement, against which there is no further appeal. Until its ruling is published, it will remain unclear if the Court will follow the Advocate-General’s Opinion and, in particular, whether it would quantify the loss to the EU budget even if it did agree with the Commission’s allegations that the UK failed to take the necessary steps to address the undervaluation fraud at its ports and, consequently, underpaid customs duties into the EU budget. The judgement would, in any event, be declaratory: the Court will declare whether the UK did breach any EU laws relevant to the dispute, and if so which. If any such breaches are identified by the judges, the Government would then be under an obligation under EU law92–applying ‘residually’ to this case as a legacy from the time when the UK was a Member State–to “to take the necessary measures to comply with the judgment of the Court”. This infringement case is unusual in the sense that the impact of breaches of EU law cannot always be undone retrospectively, but in the case of missing budget contributions the EU can pursue the UK for payment of sums allegedly owed (with, as noted, penalty interest added).

54.Therefore, if the Court does identify a UK breach of EU customs and budgetary legislation, the UK would have an obligation under the Withdrawal Agreement to remedy that failure (in particular, by paying the EU any missing amounts of customs duties93 plus a statutory penalty for late payment94). However, should the Court do so without specifically quantifying the losses–if any - to the EU budget resulting from the UK’s actions, the amount of any retrospective UK payments may still have to be resolved between the Commission and the Government, potentially through further legal action if political dialogue fails.

55.We do not take any position on the merits of the arguments made by the Government and the Commission respectively in relation to the scale of, and duty losses associated with, undervaluation fraud at UK ports, as the matter remains sub judice. However, it is important to set out some factual context to the dispute given that it could, potentially, have significant fiscal implications under the financial settlement in the Withdrawal Agreement if the UK were retrospectively found to have underpaid EU budget contributions from 2011 to 2017 based on customs duties. There may also be wider issues for consideration by Parliament relating to the robustness of the UK’s customs controls. Once the EU Court of Justice has delivered its ruling in this case, should the Government’s case for dismissal not prevail, we expect the Treasury to provide Parliament with its assessment of the legal and financial implications without delay.

2 The Withdrawal Agreement does not provide for a mechanism for the UK to suspend its payments under the settlement, not even if the EU were to breach its own obligations under that Agreement or the separate UK/EU trade deal (or vice versa). Conversely, the UK-EU Trade and Cooperation Agreement, which is discussed in more detail in chapter 2, does permit either side to suspend their obligations under that Agreement – e.g. a retaliatory re-imposition of tariffs - for a persistent failure to comply with the ruling of the arbitration panel of a breach of the Withdrawal Agreement, including the financial settlement (Article 749(4) TCA).

3 The House of Lords EU Committee in March 2017 concluded that the UK was legally able to “leave the EU without being liable for outstanding financial obligations under the EU budget”, but only in the absence of a “withdrawal agreement […] which resolves this issue”. As the UK subsequently ratified precisely such a treaty, this assessment is therefore no longer relevant. European Union Committee, Brexit and the EU budget (HL Paper 125, 2016–17).

4 UK in a Changing Europe, November 2020.

5 ibid.

6 Stefaan Van Rijnck, who was involved in the negotiations on the EU side, has also said that “the UK subscribed to the [EU] position paper [on the financial settlement] we had published in May 2017 with just one exception, which was the relocation costs of the [European Banking Authority and the European Medicines Agency]”. The final settlement did not contain an obligation on the UK to pay for the relocation of EU bodies previously located in the UK, but the Treasury did contribute to those relocations as they were funded from the EU budget (including the UK contribution).

7 Article 148 of the Withdrawal Agreement states that the “reference dates for payments by the United Kingdom to the Union or by the Union to the United Kingdom made after 31 December 2020 shall be 30 June and 31 October of every year”, with invoices issued in April and September. Actual payments are made on a monthly basis. The Agreement also contains specific rules for the payment of the amounts due under the different components of the settlement.

8 Article 135 of the Withdrawal Agreement.

9 The Treasury estimates that the UK’s net contribution to the EU budget from 31 January 2020 until 31 December 2020 amounted to €11.2 billion (£9.6 billion). HM Treasury, EU Finances Statement 2020 (July 2021), p. 78.

10 Article 140 of the Withdrawal Agreement.

11 Article 139 of the Withdrawal Agreement.

12 Council Regulation (EU, Euratom) 2020/2093 of 17 December 2020 laying down the multiannual financial framework for the years 2021 to 2027. However, the Government is seeking continued UK participation in a select number of EU programmes under the 2021–2027 MFF, for which some payments would be required. See chapter 2 of this Report for more information.

13 Council Regulation (EU) 2020/2094 of 14 December 2020 establishing a European Union Recovery Instrument to support the recovery in the aftermath of the COVID-19 crisis.

14 See Article 142 of the Withdrawal Agreement. The timing of payments varies for the different liabilities. For example, Article 142(6) states that the UK will be contributing to the pensions of regular EU staff from 30 June 2022.

15 See in particular Articles 145, 146 and 150 of the Withdrawal Agreement. The assets to be returned to the UK are fairly limited. They do not include, for example, a share of the money invested by the EU—using the UK’s contributions—to its space programme, or the returns generated by the European Investment Bank using its paid-in capital from EU countries including, until 31 January 2020, the UK.

16 The first eleven installments will amount to €300 million each. The twelfth and final instalment will amount to the residual €196 million.

17 Articles 152 to 157 of the Withdrawal Agreement.

18 See in particular the “Internal Agreement“ of 6 August 2013 establishing the 2014–2020 European Development Fund.

19 The agencies of the CSDP are the European Defence Agency, the European Union Institute for Security Studies, and the European Union Satellite Centre.

20 Articles 143, 144 and 150 of the Withdrawal Agreement. Aside from the guarantee to the EIB these contingent liabilities include, for example, the EU’s macro-financial assistance loans to a number of non-EU countries like Ukraine and Moldova, and pending legal cases against the EU if these result in the need for compensatory payments. The UK also faces a different kind of contingent liabilities in relation to any financial obligations that may arise as the result of any EU Court of Justice judgments for failure to correctly apply EU law before the end of the post-Brexit transition period. Potentially the most significant such contingent liability relates to a pending case in which the European Commission is seeking recovery of over €2 billion in allegedly evaded duties as part of a claim the UK incorrectly applied EU customs rules to imports of Chinese textiles, which is discussed further in this chapter.

21 This means the UK guarantee relates primarily to EIB lending operations which were approved on or before the UK’s withdrawal from the EU on 31 January 2020, and “other EIB risks as long as such risks are not related to post-withdrawal lending”. The Withdrawal Agreement refers to this as “other such risks that are not associated with specific financial operations and are not attributable to the stock of financial operations built after the date of entry into force of this Agreement”. The European Investment Bank has clarified that this liability exists only where “such risks are not related to post-withdrawal lending”.

22 Articles 137 and 138 of the Withdrawal Agreement.

23 From its date of withdrawal on 31 January 2020 until 31 December 2020, the UK’s contributions were calculated on the basis of the applicable EU budgetary legislation as if the UK were still a Member State, including the rebate.

24 European Commission, Consolidated Annual Accounts of the European Union (July 2021), p. 16. The UK’s shares for contributions to the “off-budget” EU programmes under the settlement are calculated separately.

25 Article 139 of the Withdrawal Agreement.

26 HM Treasury, EU Finances Statement 2020, p. 66.

27 The April invoice includes a schedule for equal payments in 4 months (from June to September) and the September invoice is followed by 8 further monthly installments (from October to May). See Article 148 of the Withdrawal Agreement.

28 HM Treasury, EU Finances Statement 2020 (July 2021).

29 Section 20 of the European Union (Withdrawal Agreement) Act 2020. Member State contributions to the EU budget consist of the payment of these “traditional own resources” (i.e. customs duties collected on imports from outside the EU), a share of each EU country’s VAT base, and a GNI-based contribution proportional to each Member State’s economy.

30 The size of the settlement is also affected by so-called “de-commitments” (planned EU spending that is ultimately cancelled), as well as whether any of the EU’s contingent liabilities to which the UK is exposed actually crystallise, in particular with respect to its guarantee to the European Investment Bank.

31 The cost of the UK’s contribution to the EU’s pensions liabilities depends, in particular, on the final salaries of the employees [covered by the EU pension scheme], their years of service and the length of time they live in retirement. In addition, the EU’s post-employment benefits for its employees are financed by a notional fund, where contributions, although not actually invested, are “considered to have been invested in the Member States’ long-term bonds”. This approach means that valuation of the cost of this liability is affected, among other things, by the yield on sovereign debt issued by EU countries, as well as by the expected rate of inflation.

32 Although the Government has warned that “the UK’s revenues from the EU may change in the context of withdrawal”—in other words, it may receive less since it is leaving than would otherwise have been the case—it noted that “this risk is mitigated because allocations for most EU expenditure in the UK have already been agreed”.

35 In Euros, the estimate was €40–45 billion. Letter from Philip Hammond, then Chancellor, to Nicky Morgan, then Chair of the Treasury Committee (24 January 2018). This figure however excluded the cost of the UK’s contributions to the EU’s ‘off budget’ programmes to which we referred above, and also presumed none of the contingent liabilities for which the UK was to resume partial responsibility would crystallise.

36 Note that the extensions did not reduce the amount the UK will pay to the EU overall, but rather meant that more of what would have been part of the Brexit settlement ended up being paid while the UK was still a Member State.

37 HM Treasury, EU Finances Statement 2020 (July 2021).

38 European Commission, Consolidated Annual Accounts of the European Union (July 2021).

39 HM Treasury, EU Finances Statement 2020 (July 2021).

40 ibid.

41 Office for Budget Responsibility, Economic and fiscal outlook – March 2021, Supplementary fiscal tables – expenditure (3 March 2021).

43 As noted, the European Commission estimate does not include EU funding flowing back to UK recipients, but it does cover the return of a share of certain EU assets to the UK Exchequer in 2021. However, that is only a small proportion of the overall receipts by the UK under the settlement.

44 Negative amounts denote payments to the UK from the EU, and the Euro-Sterling exchange rate used is €1 : £0.85.

45 HM Treasury, EU Finances Statement 2020 (July 2021).

46 Office for Budget Responsibility, Economic and fiscal outlook – March 2021, Supplementary fiscal tables – expenditure (3 March 2021). The OBR figures have been converted from sterling into euros.

48 The European Commission does not dispute the fact that the Withdrawal Agreement requires the EIB to repay the UK’s paid-in capital to the Treasury. However, this amount is not included in the Commission’s estimate of the cost of the settlement, because the Commission is only responsible for the EU’s financial accounts, and the EIB accounts – where the repayment will be recorded - are separate.

49 See above for an explanation of why the Treasury includes these amounts in its headline estimate, even though they took place before the UK left the EU on 31 January 2020.

50 HM Treasury, EU Finances Statement 2020 (July 2021).

51 In particular, the EU’s post-employment benefits for its employees are financed by a notional fund, where contributions, although not actually invested, are “considered to have been invested in the Member States’ long-term bonds” and registered in the EU’s annual accounts. This approach means that valuation of the cost of this liability is affected, among other things, by the yield on sovereign debt issued by EU countries, as well as by the expected rate of inflation.

52 European Commission, Consolidated Annual Accounts of the European Union 2020 (July 2021), p. 6.

53 However, if the Government were to decide to make use of the option to settle the UK’s contribution to the EU’s pension liability early, the amount due would be calculated using the net present value at that point (meaning it is possible there would be a significant difference in the UK’s contribution if settled this liability early, or—the default option—as payments fall due in the coming decades).

55 The EU’s consolidated accounts for 2020, in which the European Commission’s most recent estimate for the cost of the settlement is set out, only covers the return of assets from the EU to the UK for 2021 (without prejudice to the separate return of the UK’s paid-in capital by the EIB). By contrast, the Treasury and OBR both attempt to forecast the value of these assets over the entire lifetime of the settlement.

56 Office for Budget Responsibility, Economic and fiscal outlook – March 2021, Supplementary fiscal tables – expenditure (3 March 2021).

57 The Treasury’s EU Finances Statement notes that “the exception will be costs associated with legal cases related to the [EU] budget and linked policies and programmes, which will be limited to cases where the facts relate to the period of the UK’s participation in the EU budget (before the end of 2020)”.

58 European Commission, Consolidated Annual Accounts of the European Union 2020 (July 2021), p. 18.

59 The aim of these three Funds is, broadly speaking, to leverage high-risk investment by the European Investment Bank and other financial intermediaries in pursuit of EU public policy purposes by offering a guarantee from the EU budget, in effect partial indemnity, for certain investments.

60 Ireland and Portugal received financial support from the European Financial Stability Mechanism following the sovereign debt crisis, with the funds borrowed by the EU and guaranteed against its budget if these countries do not repay. €46.8 billion of these loans was outstanding at the end of 2019. Other ’bail-outs’ made to EU Member States, under the European Financial Stability Facility (used for Greece) and the European Stability Mechanism for the Eurozone, are not guaranteed against the EU budget and therefore the UK is not exposed to them under the financial settlement in the Withdrawal Agreement.

61 At the end of 2019, the EU’s outstanding macro-financial assistance loans to non-EU countries amounted to €4.7 billion. Since then however, the EU has authorised a further €3 billion assistance package under this programme for 10 non-EU countries to help them address the economic fall-out of the COVID-19 crisis.

62 European Commission, Consolidated Annual Accounts for the European Union 2020 (July 2021). Signed guarantees from the EU budget under these three schemes amounted to €53.4 billion at end-2019, according to those accounts. The settlement also covers the UK’s share of contingent liabilities related to EU guarantees for financial operations under its Multiannual Financial Framework 2014–2020, like the EU’s “InnovFin” investment facility for research conducted by small companies under the ‘Horizon 2020’ Research Framework Programme.

63 HM Treasury, EU Finances Statement 2020 (July 2021), Table E.2, p. 77.

64 European Investment bank, Financial Report 2020 (3 May 2021).

65 EIB, “Statute and other Treaty provisions” (March 2020), in particular Articles 4 and 5.

66 Article 151 of the Withdrawal Agreement.

67 The contingent liability also extends to “other EIB risks as long as such risks are not related to post-withdrawal lending”. Such “other risks” may, for example, relate to asset-liability management risks and operational risks.

68 Article 150(6) of the Withdrawal Agreement.

70 Article 150(1) of the Withdrawal Agreement defines the UK’s liability towards the EIB as “financial operations approved by the EIB before the date of entry into force of this Agreement […] and […] other risks assumed by the EIB”. It goes on to state that “the liability of the United Kingdom shall extend to the EIB financial operations and to asset‐liability management risks and operational risks attributable to the EIB financial operations”, while “for other such risks that are not associated with specific financial operations” the UK only has a liability where these “are not attributable to the stock of financial operations built after the date of entry into force of this Agreement” (i.e. 31 January 2020).

71 This is technically a two-part guarantee, consisting of the UK’s €3.5 billion of paid-in capital with the EIB, which is being repaid in twelve annual installments, and its subscribed but uncalled capital of €35.7 billion. See Article 150 of the Withdrawal Agreement, paragraphs 3 and 5.

72 Article 150(3) and (5) of the Withdrawal Agreement.

73 European Investment bank, Financial Report 2020 (3 May 2021).

74 HM Treasury, Consolidated Fund account 2019 to 2020 (29 September 2020), p. 13.

75 This position is unchanged from the Treasury’s original forecast in January 2018.

76 The European Commission’s consolidated annual accounts for the European Union, which contain its estimate for the cost of the financial settlement, do not cover the EIB’s accounts and accordingly does not contain any information on the likelihood, or lack thereof, of the EIB requiring a capital injection from the EU Member States and the UK.

77 The estimates produced by the Treasury and Commission are reasonably close together with respect to the gross cost of the outstanding RAL to the UK, at €34 billion (£29 billion) and €35 billion (£29.8 billion) respectively. The net amount would see this reduced by the amount of EU funding flowing back to the UK under the settlement from 1 January 2021 onwards.

78 While the settlement requires the UK to pay for a share of all EU RAL even where related to earlier Multiannual Financial Frameworks (i.e. the 2007–13 EU long-term budget), the amount of outstanding commitments not related to the 2014–2020 budget will be small.

80 More specifically, any changes introduced to the Multiannual Financial Framework spending limits after the UK’s withdrawal on 31 January 2020—and therefore, without the Government’s approval—do not apply to the UK “insofar as those amendments have an impact on the United Kingdom’s financial obligations”.

81 Council Regulation (EU, Euratom) 2020/538 of 17 April 2020 amending Regulation (EU, Euratom) No 1311/2013 laying down the multiannual financial framework for the years 2014–2020 as regards the scope of the Global Margin for Commitments.

83 Letter from the European Scrutiny Committee to the Chief Secretary to the Treasury (7 May 2020).

84 At that point, the EU anti-fraud body OLAF concluded an investigation into the UK started in January 2015.

86 The Member States act as the EU’s ‘collecting agent’, transferring 80 per cent of customs duty receipts to the European Commission and retaining 20 per cent as a collection fee.

88 European Commission, Consolidated Annual Accounts for the European Union 2020 (July 2021), 71.

89 Article 12 of Regulation 609/2014 provides that “any delay [by Member States] in making the entry in the account [of EU revenues] shall give rise to the payment of interest by the Member State concerned”.

90 In particular, Article 136 of the Withdrawal Agreement states that “the applicable [EU] law concerning the Union’s own resources relating to financial years until 2020 shall continue to apply to the United Kingdom after 31 December 2020, including where the own resources concerned are to be made available, corrected or subject to adjustments after that date”.

91 Opinion of Advocate-General Pikamäe, delivered on 9 September 2021, in Case C213/19 (European Commission v United Kingdom of Great Britain and Northern Ireland).

92 In particular, Article 260 TFEU which requires EU countries to “take the necessary measures to comply with the judgment of the Court”.

93 As all Member States, then still including the UK, would automatically have made higher contributions to the EU budget over the period concerned to compensate for the reduced revenues from customs duties, the total cost to the UK would be somewhat lower as it would be entitled to the return of some of those additional contributions.

94 The size of any additional financial penalty for late payment would depend on the size of the underpayment of EU budget contributions linked to the missing customs duties.




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