Why does the UK have to pay the EU divorce bill?

As Theresa May prepares to trigger Article 50, the negotiations will begin in earnest as Britain slowly extricates itself from the EU.

Several issues will be raised between the two sides, but one issue in particular has been raised in recent days, the EU divorce bill.

It is thought that the UK will need to make some form of payment as it departs the EU, Theresa May herself said that "appropriate" payments to the EU for participation in "specific programmes" could be made.

These "appropriate" payments may help gain some form of access to the single market or the customs union in some way. But the overall threat of a divorce bill still looms.

Late last year, it was thought that the European Commission was seeking an exit bill of €60bn – around £50bn. However, in February, the Centre for European Reform (CER) estimated that the bill could range from €25-73bn.

Why is there a divorce bill?

The EU is an organisation with assets and liabilities, and according to the Institute for Government, when the UK leaves, European negotiators are expected to argue that the UK pays off its share of the liabilities.

The CER calculates what we can expect to pay based on what we owe, and what we can offset. It estimates something between €25bn (based on honouring commitments made in annual budgets and maximising UK receipts), and €73bn (maximum obligations, minimum receipts).

There are three different areas where the UK may have to pay up in:

Budget commitments

A key element of EU spending allocations consists of cohesion fund payments, aimed at raising living standards in the 2004 accession countries.

According to the CER, only 25-30% of the biggest cohesion fund payments will actually have been spent by the time Britain is expected to leave the EU in 2019.

The EU may argue that the UK should honour the obligations it signed up to for this budget period even after we leave. The UK may seek to use our exit date as a cut-off.

EU pensions

Like the UK civil service pension scheme, the Pension Scheme of European Officials is an unfunded scheme and operates on a "pay-as-you-go basis", with costs being covered by the annual EU budget as they arise. The EU may argue that the UK should make a payment now to cover future liabilities incurred while we were a member.

Liabilities

The EU incurred contingent liabilities during UK membership. These liabilities effectively constitute payments that would be triggered in specific circumstances only, for example, Ukraine defaulting on its EU loan.

Can the UK can anything back from the EU?

The CER argues that Britain's exit obligations should be partly offset by its share of EU assets, rebates and budget receipts. In the EU's accounts, the EU's total assets amount to €8.6bn of property, plant and equipment, and €13.9bn of assets available for sale.

The UK's share of this is estimated at €2.7–3.4bn, this could be a sum that the British negotiators work on trying to recoup.

Is the government prepared to make any payments?

In its latest forecast issued at the time of the Budget, the Office for Budget Responsibility assumed that any savings on our annual contribution would be recycled into UK public expenditure. No explicit provision was made for any exit payment.

Ministers have been coy on answering questions to do with any form of payments before the actual negotiating begins, but the Brexit Secretary David Davis offered a small insight into the government's thinking.

Speaking during BBC's Question Time on Monday night, he said: "I don't know about £50 billion, I've seen £40billion, £50billion, £60billion, I've seen no explanation for any of them.

"The Prime Minister said we are coming to the end of the time when we're paying enormous sums into the European Union. We'll of course meet our international obligations but we expect also our rights to be respected too. I don't think we're going to be seeing that sort of money change hands.

"We have said before that we will meet our international obligations, whatever that turns out to be. But that is nothing like what we're talking about here – indeed the House of Lords committee on this subject reckoned that that was was zero only a few weeks ago."