Google was under pressure to overhaul its tax arrangements last night after Facebook bowed to public outrage and began registering British sales in the UK.
The social-networking company is expected to pay millions of pounds more in UK corporation tax after announcing that it will record up to £800 million in yearly advertising sales in Britain not Ireland.
The move, which will be seen as a victory for George Osborne, will allow HM Revenue & Customs to recoup a “substantial” amount of tax from Facebook, a company source said.
In contrast, Google has refused to alter its own offshore tax structure despite it being almost identical to its fellow multinational.
In January, Google paid £130 million to HMRC to settle a 10-year tax inquiry into its UK business. Despite the payment, the American internet giant will continue booking UK sales through Dublin, a process that critics say artificially minimises its UK tax bill. Once in Ireland, Google further minimises tax by channelling profits to Bermuda.
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Facebook used a similar structure to limit its UK tax bill to £4,327 in 2014, despite its UK advertising sales reaching about £800 million last year, according to estimates from eMarketer. Globally, the company makes more than £1 billion of profit every quarter.
Facebook refused to divulge the proportion of UK sales that it expects to be affected, but revenues from all major businesses such as Tesco, Sainsbury’s, Unilever, the consumer goods company, and WPP the advertising giant, will now be registered in the UK.
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.
The turnaround comes after the government introduced a Diverted Profits Tax (DPT) which threatened multinational companies with a punitive 25 per cent tax rate on any profits “artificially” diverted offshore.
Amazon, another technology company which has been accused of funnelling profits through tax havens, announced last May that it would begin registering UK-sales in the UK.
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A Facebook source said that the company’s tax lawyers did not expect the company to be liable for the DPT but had recognised that it was a potential tax risk.
In Google’s case, HMRC controversially agreed that its structures were not in breach of the DPT.
Andrew Watters, a tax specialist at Thomas Eggar, the law firm, said: “The decision comes not from legal necessity but from the fear of bad publicity.
“It may have been influenced by conversations with high-profile clients who saw potential reputational damage to themselves and wanted to make out cheques to a UK company for services provided to them in the UK.”
Facebook’s UK division had paid £855,832 in tax between 2006 and 2014 after recording sales last year of £105 million, figures from Duedil, a company registry, showed. Facebook Ireland Ltd paid €14.8 million in tax over the same period despite registering sales last year of €4.837 billion.
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Jolyon Maugham, QC, who is an expert in tax, said that the extra tax being paid by Facebook UK next year might not be “especially meaningful”.
Costs would be deducted to reflect that the technology was developed in the US, he said. In addition, the company could use up to £21.4 million of tax reliefs to offset against future profits.
Facebook employs 850 people in the UK and is building a new headquarters in London. The company does not reveal the size of its UK business because it does not form more than 10 per cent of its global operations, which generate revenues of nearly $18 billion (£12.7 billion) a year.
Facebook’s new structure has been discussed with HMRC, although there is no formal agreement with the tax authority, which is thought to be investigating its 2010 to 2014 accounts.