Page last updated at 12:11 GMT, Tuesday, 19 May 2009 13:11 UK
EU budget

Graph showing contribution to the UK rebate by country

The UK rebate is a system that provides the UK with a refund on a part of its contribution to the EU budget.

The UK argued for the rebate, which was introduced in 1984, because at the time it was the third poorest member of the Community but on course to become the biggest net contributor to the EU budget.

The main reason for this was that the UK had relatively few farms, so it got a small share of farm subsidies, which at the time made up 70% of budget expenditure.

Agricultural funds now account for under half of the budget but the UK still receives less in farm subsidies than France, Germany, Spain and Italy.

In 1984, the formula for determining how much a country paid into the Community budget was also unfavourable to the UK due to its emphasis on VAT-related income. The UK was in effect penalised for raising more revenue from VAT than most other member states and importing more goods from countries outside the Community.

Splitting the bill

The rebate is equivalent to 66% of the UK's net contribution in the previous year and is paid for by the other 26 member states as a roughly equal proportion of their economy.

However, four major net contributors to the EU budget - Germany, the Netherlands, Sweden and Austria - successfully negotiated a clause that means they pay only a quarter of what would otherwise be their share.

In other words, they have a "rebate on the rebate". The result is that France and Italy, between them, pay about half of the total.

The poorer EU countries pay much less in nominal terms but many resent having to make payments to a country far richer than they are. However, they still remain net beneficiaries of EU funds, receiving more in EU spending than they pay in.

Rising costs

The size of the rebate is rising, as net contributors pay more to cover the increased cost of the enlarged EU. The UK is a one of those net contributors but because the rebate is calculated as a percentage of payments, when the payments increase the rebate also increases.

However, the UK's agreement in December 2005 to give up a total of 10.5bn euros of the rebate between 2007 and 2013 means that it will not rise by as much as it otherwise would have done. By 2007, the rebate was still worth around 5.2bn euros and in 2009 it had risen to 6.3bn euros.

Even taking into account the rebate, the UK is one of the largest net contributors to the EU budget. Had it not been for the rebate, its net contribution would have been even bigger than Germany's in 2007.

Chart showing main net contributors to EU budget

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