Facebook is to pay millions of pounds more in tax in the UK after a radical overhaul of its tax structure.
Responding to public criticism over its tax avoidance, the US social-media company will now register all major advertising sales in Britain, allowing the profits generated by the sales to be taxed in the UK.
There was widespread controversy when it was revealed that Facebook paid £4,327 in corporation tax in the UK in 2014, even though Britain is one of the company’s biggest markets outside the US.
The company minimised UK corporation tax by routing sales to UK customers through low-tax Dublin even in cases involving a UK-based sales team. Globally, the company makes more than £1 billion of profit every quarter although it does not break out figures for the UK.
The change, which will be seen as a significant victory for George Osborne, will put pressure on Google, which has refused to alter its own tax structure which is almost identical to Facebook’s.
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Google settled a ten-year tax inquiry into its UK business for £130 million in January. But the US internet giant will continue to register sales to UK customers through Dublin, before re-routing profits to the even-lower tax haven of Bermuda.
Amazon, another technology multinational with a similar offshore arrangement, announced in May that it would register UK-sales in the UK, leaving Google out in the cold.
“On Monday we will start notifying large UK customers that from the start of April they will receive invoices from Facebook UK and not Facebook Ireland,” a Facebook spokeswoman said.
“What this means in practice is that UK sales made directly by our UK team will be booked in the UK, not Ireland. Facebook UK will then record the revenue from these sales.”
Facebook refused to divulge the proportion of UK sales it expects to be affected. But revenues from all major businesses such as Tesco, Sainsbury’s, the consumer goods firm Unilever and the advertising giant WPP will now be booked in the UK.
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Smaller business sales where advertising is registered online - with little or no Facebook staff intervention - will still be routed through Ireland, which will remain the company’s international headquarters.
A Facebook source said that the company was responding to Mr Osborne’s diverted profits tax (DPT), which threatened multinational companies with a punitive 25 per cent tax rate on any profits “artificially” diverted offshore.
The source said that Facebook’s tax lawyers did not expect the company to be liable for the DPT but had recommended the change to achieve clarity.
Facebook wants to expand its UK business, employing more sales staff and investing in research and development. This also persuaded the company to move much of its revenue back onshore, the source said.
The company does not reveal the size of its UK business because, unlike Google, the UK does not form more than 10 per cent of its global operations, which generate revenues of nearly $18bn (£12.7bn) a year.
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But Facebook still employs 850 people in the UK and is building a new headquarters in London. The company’s new structure has been discussed with HMRC, although there is no formal “agreement” with the tax authority.