Britain sets up new Brexit battle with the EU as it sets 'divorce bill' it is willing to pay at £37.3billion - some £3.5billion LESS that Brussels is demanding as the cost of leaving

• Treasury estimates the UK should have to pay Brussels £37.3billion to leave bloc
• Last week the EU estimated the fee at £40.8billion, warning that it was 'final' 
• Brexit minister Lord Frost rejected calls to withhold payment over NI trade row 

Britain and the EU are set to clash over the cost of Brexit after their estimates of how much the UK's 'divorce bill' will be were set £3.5billion apart.

The Treasury confirmed this afternoon that it estimates the UK should have to pay Brussels £37.3billion to severe its ties to the bloc.

But last week the EU's own estimate set the fee at £40.8billion, warning that it viewed that amount as 'final'.

It came as Brexit minister Lord Frost rejected calls to withhold payment of the bill over a continuing dispute about Northern Ireland's trading arrangements. 

He said threats made had 'overwhelmingly' come from the EU, but he told the Lords he did not feel it would be right to hold the financial legal obligation 'in hoc' to the issue.

Confirming the UK government's estimate of the divorce bill in a written statement to Parliament, Chief Secretary to the Treasury Steve Barclay said: 'HM Treasury estimate that the current value of the financial settlement is £37.3bn. 

'This remains within the Government's previously published reasonable central range, adjusted to take into account the UK's 31 January 2020 exit date.'

He added that the UK has already paid 3.74 billion euros (£3.19billion).

Last week the EU's annual accounts revealed it has set the estimated bill at 47.5 billion euros (£40.8 billion). 

 European Commission spokesman Balazs Ujvari said: 'The report is final ... and the calculations were made in line with the withdrawal agreement. 

A methodology for calculating the sum was agreed during negotiations for the Withdrawal Agreement that paved the way for the UK's departure, but an exact figure was not agreed.

The Office for Budget Responsibility (OBR) estimated it to be £37.1 billion in 2018.

Downing Street said it does not accept the revised EU sum, saying it does not take into account money owed to the UK by Brussels.

Explaining the difference during question time in the House of Lords, Lord Frost said Brussels' figure 'is an estimate produced on a different basis by the EU for its internal accounts processes'.

Pressing the minister, Tory peer Lord Moylan said: 'These are large sums... and it appears the EU is the final arbiter of what we should pay.

'I understand there are circumstances where you might want to give a trusted friend details of your credit card, including the three numbers on the back, but if that trusted friend is abusing the card isn't the right policy to cancel it?'

Lord Frost said: 'It is a legal obligation to make the payments to the EU that have been agreed in the Withdrawal Agreement. They were very heavily negotiated in some detail at the time and of course we stand by them.'

He later added: 'I don't think any of us on this side of the House feel particularly comfortable in paying large sums to the European Union but it is an agreed outcome in the Withdrawal Agreement and we stand by it.'

Lord Frost said he was 'not surprised' at the difference between the EU and British figures, and told peers: 'What matters is our own calculations and that we are comfortable with the bills when they arrive, which we are.'

Non-affiliated peer Baroness Hoey, a former Labour MP and prominent Brexiteer, said: 'As the European Union continues to show intransigence and a determination to show no flexibility whatsoever to the working of the Protocol, is it not time for the Government to hold back any more payment until the European Union shows itself to be more reasonable?'

Lord Frost said: 'Where threats are made in this process, they have overwhelmingly come from the European Union side and we regret that.

'I don't think it would be right to hold this legal obligation in hoc to progress on the Protocol, which is not to say that we don't think progress on the Protocol and implementing it in a pragmatic, proportionate and appropriate way is not very important. It is extremely important, but it is not the same thing as the exit bill.'

The British Government and the EU are locked in a row over the implementation of the Northern Ireland Protocol, which keeps the region in the single market and avoids a hard land border with the republic.

This has angered unionists by effectively creating a barrier for the supply of goods between Great Britain and Northern Ireland.

The UK accuses Brussels of not operating the arrangement in a 'pragmatic and proportionate way'.

It comes after Cabinet Office officials told peers this week that the EU had dumped more than 800 new pieces of regulation upon Northern Ireland without notice.