The UK rebate (or UK correction) was a financial mechanism that reduced the United Kingdom's contribution to the EU budget in effect since 1985. It was a complex calculation which equated to a reduction of approximately 66% of the UK's net contribution – the amount paid by the UK into the EU budget less receipts from the EU budget. Based on a net contribution of €11.7 (£9.6) billion in 2016, the UK Treasury estimated the 2017 rebate amounted to €6.6 (£5.6) billion reducing the ultimate UK contribution for the 2017 budget to €10.4 (£8.9) billion. Although the rebate was not set in the EU treaties, it was negotiated as part of the Multiannual Financial Framework (MFF) every seven years and had to be unanimously agreed.
History
In April 1970 the six founding member states of the then European Communities (EC) adopted the so-called 'own resources system' as the means of funding the EC budget. Under this system, revenues were to flow automatically to the EC budget rather than through agreement of the national parliaments, as had been the case until then, and calculated based on three elements: Customs duties collected on imports from the rest of the world Agricultural resources VAT base.
As the UK's VAT base in comparison with gross national product (GNP) was proportionally higher than in other member states, and the UK was more open than other member states to trade with non-EC countries, this system implied a disproportionate contribution by the UK when it joined the EEC in 1973. Additionally, the fact that around 70 per cent of the EC budget was used to finance the Common Agricultural Policy (CAP), and that the UK had a small agricultural sector meant that the UK gained few receipts under the EEC's redistributive policies.
To address this, at the Fontainebleau European Council in June 1984 Prime Minister Margaret Thatcher successfully negotiated the UK Rebate which was adopted in the May 1985 European Council decision. It was in place until the United Kingdom's withdrawal from the European Union.
In 2005, Prime Minister Tony Blair agreed to exclude from the calculation most enlargement-related expenditure (with a progressive phasing-in of the change from 2009 onwards), so as to contribute to the financing of the enlargements to the European Union, with the accession of Central and Eastern European states, that the country itself had strongly supported. The objective was to address what was widely perceived as an unfair effect of the rebate, since the original mechanism would have resulted in the UK contributing little to the costs of enlargement. These changes were adopted in the June 2007 European Council decision.
Calculation and mechanics
Calculating the size of the UK's annual rebate was complex. Broadly, the UK got back 66% of the difference between its share of member states' VAT contributions and its share of EU spending in return. The European Commission set out the detailed calculations in a working document.
The calculation of the rebate for any one year was budgeted and paid for the following year, and the payments were subject to revision for up to three further years. There was no transfer of money from the European Commission to the UK Treasury involved; the effect of the rebate was to reduce the size of the UK's payments.
The effect of the rebate was to increase contributions required from all other member states, to make up the loss from the overall budget. Germany, the Netherlands, Sweden and Austria all had their contribution to make up for the rebate capped to 25% of the figure which would otherwise apply.
Pressure for change
There had been growing pressure in recent years before Brexit from various EU member states for the rebate to be scrapped. This was partly because the recent additional member states of the EU, which are considerably poorer than the fifteen pre-2004 states, are a considerable expense on the CAP and the EU budget in general. The view was put forward by many that this made the UK rebate harder to accommodate within the EU budget, leveraged with the moral argument that all the new entrants were substantially poorer than the UK. The new entrants, however, are likely to be net recipients of EU funds and not net contributors like the UK was, and only Germany makes a larger contribution to these poorer entrants.