Brexit: what you should know about the £40bn ‘divorce bill’

Theresa May appears to have convinced the Cabinet to back plans to double the EU “divorce bill” offer from £20bn to up to £40bn in exchange for assurances that UK-EU trade talks will move ahead.

Although financial details won’t be released until later in the week, claims that government Brexiteers have agreed to the increased payout were widely reported after a two-hour cabinet meeting in Downing Street yesterday.

But exactly what is the UK paying for, and why?

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What is the divorce bill?

The bill is the financial statement of accounts as of March 2019, when Britain opts out of European Union membership. The settlement is to ensure the UK keeps the financial promises made during its period as a member state. The UK’s commitments are for the EU budget period up to 2020, but they may also extend beyond that time to include long-term projects and plans such as rail investments, pensions promised to Members of the European Parliament (MEPs), and liabilities for losses, The Guardian reports.

How much does the UK owe?

This question is hotly debated, because the exact formula hasn’t been negotiated. The EU estimates the UK contribution at about €60bn (£53bn) net, but according to the Financial Times, that figure could balloon to €100bn (£88.6bn) gross. Britain estimates its financial commitment at a much lower rate, however. Some MPs claim the UK owes nothing, reports the London Evening Standard.

Why is there pressure to agree on the divorce bill now?

The EU won’t move ahead with trade talks - which the UK is anxious to start in December - unless Britain comes to a financial arrangement. The UK’s negotiators would much prefer to take the position that nothing is agreed in the Brexit talks until everything is agreed, in part so that trade-offs can be made.

Will the EU owe the UK money in March 2019?

Not likely. The final amount agreed will be deducted from assets that the UK has with the EU, including an estimated €150bn (£133bn) in cash and property, Quartz says.

What’s the worst-case scenario?

The worst scenario is that the Europeans demand billions more than the UK is prepared to pay, resulting in talks breaking down, Bloomberg says. If the two sides can’t resolve their differences, the UK would leave the EU without a pact, resulting in World Trade Organization tariffs and double-digit price rises in the UK on everything from food to cars.