This Insight has been updated to reflect the EU (Withdrawal Agreement) Bill 2019-20 introduced on 20 December 2019. A previous version of this Insight discussed the EU (Withdrawal Agreement) Bill 2019 which received its Second Reading in October 2019. 

The Withdrawal Agreement sets out how the UK and EU will settle their outstanding financial commitments to each other, which arise out of the UK’s participation in the EU budget as a Member State and broader aspects of its EU membership. The agreement reached on these financial aspects is known at the financial settlement (the settlement).

It is estimated that the settlement may cost the UK around £30 billion by the time the final payment is made, possibly in the 2060s. A definitive figure can’t be produced for the final cost as it depends on future events.

This Insight sets out what has been agreed in the financial settlement and explains how the UK Government aims to implement it through the EU (Withdrawal Agreement) Bill.

What is included in the settlement?

The terms of the financial settlement are the same in both the Withdrawal Agreement negotiated by Theresa May’s Government and the latest version.

The settlement sets out the financial commitments that will be covered, the methodology for calculating the UK’s share and the payment schedule. 

Broadly speaking, the financial settlement can be split into three components:

  • During the transition period, until the end of 2020, the UK will pay into the EU budget almost as if it were a Member State. The UK will also receive funding from EU programmes – such as structural funding.
  • EU annual budgets commit to some future spending without making payments to recipients at the time. The commitments will become payments in the future. The UK will contribute towards the EU’s outstanding commitments as at 31 December 2020. Recipients in the UK will also receive funding for outstanding commitments made to them.
  • The UK will share the cost of EU liabilities that exist at the end of 2020, and any materialising contingent liabilities (potential liabilities that may occur depending on the outcome of an uncertain event in the future) entered into before its withdrawal, and will receive back a share of some assets. The pensions of EU staff are likely to be the most significant liabilities for the UK, while the most significant item being returned to the UK is the capital it paid into the European Investment Bank.
Chart shows financial settlement net payments. The UK will make around 75% of payments by the end of 2023. Small payments are still expected in the 2060s

What does the Bill say about the settlement?

Payments to the EU

The Bill establishes how the UK will make its financial settlement payments to the EU.

Until 31 March 2021, financial settlement payments will be made directly from the Government’s current account (the Consolidated Fund) without the need for Parliament’s annual approval. This direct payment method is known as a standing service provision. This is the way that the UK currently makes its payments, as a Member State, to the EU, under the European Communities Act 1972.

If it wished, the Government could also make payments out of the account it usually uses for its borrowing and lending (the National Loans Fund).

This will change after 31 March 2021, when most financial settlement payments will become part of Parliament’s annual process for approving Government spending (each year Parliament’s authorisation is required for most government spending through the Estimates process). The exceptions relate to financial settlement payments that arise from the customs duties and sugar levies collected by the UK on the EU’s behalf.

The Government has not explained why it would like the standing service provision to end after 31 March 2021. Around two-thirds of the UK’s net payments could still be due at 31 March 2021.  When Theresa May’s Government set out how it would legislate for the financial settlement (in its White Paper) it said that it would use a standing service provision and no time limit was mentioned. As the size of payments will vary, May’s Government reasoned that making financial settlement payments would require flexibility, which is better provided through a standing services provision.  

Seeking annual approval from Parliament potentially opens the payments up to more scrutiny but introduces the possibility that the spending might be voted down or amended by the House of Commons. However, the UK would still be required to meet its legal obligations under the financial settlement.

The previous Bill (The European Union (Withdrawal Agreement) Bill 2019) included a provision that would have allowed a Minister (after getting Parliament’s approval) to amend the date when the standing service ends (31 March 2021). The current Bill does not allow Ministers to change the date. Previously, when they were proposing to allow for Ministers to change the date, the Government believed that “the House of Commons should have the option to choose this, rather than rely on an annual process involving multiple votes, which cannot extinguish or effect the international legal obligations on the UK.”

Payments to the UK from the EU

The Bill also states that EU payments to the UK will be paid into the Consolidated Fund or, if the Government wishes, the National Loans Fund. This includes  capital the UK paid into the European Investment Bank, which is being returned.

Areas subject to other legislation

The financial settlement covers the UK’s contribution to the EU’s international development programmes (European Development Fund, EU Trust Funds and Facility for Refugees in Turkey). These areas sit outside of the EU Budget and the UK currently contributes to them through powers set out in the International Development Act 2002. This Bill says that this will continue to be the case.

What does the Bill not do?

Payments during the future UK-EU relationship

Only payments arising directly from the financial settlement are authorised by the Bill. It doesn’t cover payments relating to any future agreements between the UK and the EU.

For example, the Bill doesn’t authorise financial contributions if in the future the UK negotiated to participate in EU programmes such as those related to science and innovation.

Set out scrutiny arrangements

Theresa May’s Government suggested the Bill could be used to ensure the Government provides regular updates to Parliament on the financial settlement, including how much remains to be paid in the future. Such scrutiny arrangements aren’t included in the Bill. This doesn’t necessarily mean that Parliament won’t be updated on the payments. The Treasury currently presents information to Parliament on the UK’s contributions and receipts as a Member State in previous years, without it being required to do so by law.

Further reading

About the author: Matt Keep is a Senior Library Clerk at the House of Commons Library, specialising in public finances.