The 5-Minute Briefing: Britain's EU rebate

Margaret Thatcher won the annual refund from the EU in 1984 at a summit in Fontainebleau at which she wielded her handbag and demanded Britain's money back. Officially known as the abatement, the rebate compensates the UK for paying more into EU coffers than it gets back. That is mainly because Britain receives little from the Common Agricultural Policy compared with other big countries. British contributions vary from year to year as does the rebate but it is usually in the region of €4bn to €5bn annually.

What is the rebate?

Margaret Thatcher won the annual refund from the EU in 1984 at a summit in Fontainebleau at which she wielded her handbag and demanded Britain's money back. Officially known as the abatement, the rebate compensates the UK for paying more into EU coffers than it gets back. That is mainly because Britain receives little from the Common Agricultural Policy compared with other big countries. British contributions vary from year to year as does the rebate but it is usually in the region of €4bn to €5bn annually.

Why is the rebate under pressure?

Britain has to negotiate it in June when the next EU funding period (2007-13) is up for discussion. The UK has a veto but is in a minority of one in defending the rebate. The case for it has weakened since 1984 because Britain has become richer and the proportion of the EU budget devoted to farm subsidy has shrunk. Several other countries now also pay much more into the EU than they get out, including Germany, the Netherlands, Sweden and Austria. And all EU countries contribute to the UK's cashback. When eight former Communist countries joined the EU last year they were unimpressed to find themselves contributing millions to fund the British rebate.

How good is Britain's case?

Britain says that without the rebate it would have paid 14 times more into the EU than France between 1995 and 2002, and 10 times more than Italy net per capita. That is only half of the story, however. Britain's case is good compared to France but not compared to that of the Netherlands or Austria. The UK has a better (if self-serving) point when it says other net payers will benefit more by capping overall EU spending than by trying to divide the benefits of the rebate among them.

Why is it in the news now?

Tony Blair hoped to keep it off the agenda until after the election. But the Luxembourg presidency of the EU has tabled the issue formally. A document discussed by ministers yesterday listed as the first of four questions requiring "further in-depth examination" the issue of "the UK rebate (justification, modalities, duration"). Other items the Luxembourgers want to discuss include a "generalised correction mechanism" to share the benefits of the rebate with other net-paying countries, and of a single tax to fund the EU (now there is a complex formula based on VAT receipts and duties). The document also has better news for the UK because it argues that EU spending in 2007-13 will have to be less than that proposed by the European Commission. A compromise, it says, "will inevitably result in some reductions in each and every category of [EU] expenditure".

When will it be sorted out?

Probably not in June, when it is supposed to be. Whoever is Prime Minister will hardly want to surrender the rebate without a fight. Britain's critics are taking an increasingly hard line. At least one summit rift is likely before a compromise can be struck.