One of the key roles of the withdrawal agreement is to set out how the UK and EU will settle their outstanding financial commitments to each other. The financial settlement – currently estimated at a cost of around £35-£39 billion – has regularly been described as the ‘divorce bill’, ‘exit bill’ or ‘brexit bill’.

The UK and EU reached a political agreement on the settlement in December 2017. The withdrawal agreement – now the subject of five day’s debate in the House of Commons – turns this political agreement into legal text.

Here we look at what the two parties have agreed, what the financial settlement includes, when the UK is expected to pay and what could happen to the settlement if the withdrawal agreement isn’t ratified.

What is the financial settlement?

The financial settlement sets out the commitments that will be settled, how payments will be calculated and when payments will be made. It does not set out the actual amounts that the UK will pay.

What are the principles behind the settlement?

The UK and EU agreed three underlying principles for the settlement:

  • the UK’s withdrawal from the EU shouldn’t make any member states financially worse off;
  • the UK should pay its share of EU spending agreed to whilst it was a member;
  • the UK should not pay any more, nor earlier, than if it had remained a member state

The last of these principles means that, at this stage, the cost of the settlement can only be estimated. The UK will only pay its share of the actual payments made by the EU, not estimates of them.

What is included in the settlement?

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

  • During the transition period, until 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 – as if it were a Member State
  • 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 financing of some EU liabilities as at the end of 2020 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 (EIB).

The estimated net payments for the financial settlement are: £20 billion for outstanding commitments; £16 billion for the transition period; and £3 billion for net liabilities

Not everything in the settlement fits neatly into these three components. For instance, the UK has agreed to continue to contribute to the EU’s main overseas aid programme – the European Development Fund – until the current programme ends. This programme is funded directly by member states, rather than through the EU budget. The UK’s contribution counts towards its commitment to spend 0.7% of national income on overseas aid.

When will the UK pay the money?

Around 75% of the UK’s net payments are expected to be made by the end of 2022. The most significant costs are those associated with the transition period and sharing the EU’s outstanding commitments, which are expected to be paid off by 2028.

Current estimates suggest that the UK will be making some payments for EU-staff pensions in the 2060s. The withdrawal agreement does, however, allow for the UK and EU to agree earlier payment.

The financial settlement is expected to be paid over 60+years, but 75% of the cost is estimated to have been paid by the end of 2022

What if the transition period is extended?

The transition period could be extended. If this happens a committee, made of UK and EU representatives, will decide the size of the UK’s contributions to the EU. The decision will be based on the UK’s status during the period. The financial settlement will not be affected if the transition period is extended, the settlement will continue to be paid in the same way whether the transition period is extended or not.

What will happens if the withdrawal agreement isn’t ratified?

If the withdrawal agreement isn’t ratified the financial settlement will not become legally binding. It isn’t clear what then happens to the outstanding financial commitments.

It seems probable that politics and economic considerations will lead to the UK and EU negotiating an alternative settlement. The Government’s view is that it has financial obligations that it will meet and not doing so could see the UK portrayed as an unreliable partner. Future collaboration between the UK and EU could be difficult if the EU feels that the UK hasn’t settled its account.

There have been attempts to look at the issue from a strictly legal perspective: what would the UK legally be obliged to pay if there is no withdrawal agreement? A Lords Committee heard a range of views, but concluded that without a withdrawal agreement, under EU law, the UK could leave without accepting any liability for outstanding financial commitments although they also said that the political and economic consequences of doing so “are likely be profound.” The Government’s opinion is that the UK has legal obligations that it will meet. The Treasury has said that the issue would either have to be settled through a negotiated settlement or through the courts. Both the Lords Committee and the Institute for Government have said that the EU may seek redress through international courts if the UK refuses to make payments, but the process may be slow and outcome hard to predict.

For more, see the Library briefings:

Matt Keep is a Senior Library Clerk at the House of Commons Library, specialising in the EU budget and public finances.