Facebook will pay millions of pounds more in UK tax

From April, the company will end the practice of routing sales from major UK companies through Ireland, where they were liable to corporation tax at the lower rates charged in the Republic.

Facebook was roundly criticised after paying just £4,327 in UK corporation tax in 2014, while more than doubling its UK staff share bonus pot to £35.4 million.

Corporation tax is charged at 20% on taxable profits, but Facebook’s accounts showed a loss of £28.5 million for the year in Britain, under an arrangement which treated the UK operations revenues as a payment from Facebook Ireland for services.

The total corporation tax bill for the company – which has global profits of more than £1 billion every three months – amounted to less than a worker on the average wage would pay in income tax and national insurance. Furthermore, Freedom of Information request from Channel 4 News showed that it was less than a sixth of the £27,000 paid by HMRC for adverts on the site urging people to pay their taxes.

The Treasury said it was clear that the new 25% diverted profits tax introduced by Chancellor George Osborne was having an impact.

A Treasury spokesman said: “The Chancellor introduced the world’s first diverted profits tax to ensure multinationals change their behaviour, rather than artificially shifting profits out of the UK. We can see it is already starting to have an impact.”

The tax targets multinational enterprises which enter into “contrived” arrangements to avoid a taxable presence in the UK and is applicable to profits arising after April 1 2015. HMRC will shortly begin assessments of companies’ liabilities for the first year of the tax, though it is not yet known whether any of Facebook’s activities during the current tax year will be deemed to fall under its provisions.

‘Transparency’

Facebook played down suggestions that it was responding to public and political anger over its tax arrangements, assuring that the new set-up was designed to improve “transparency”.

In a statement, a Facebook spokesman said: “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. 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.

“In light of changes to tax law in the UK, we felt this change would provide transparency to Facebook’s operations in the UK. The new structure is easier to understand and clearly recognises the value our UK organisation adds to our sales through our highly skilled and growing UK sales team.”

There was no guidance from Facebook on how much additional revenue from advertisers can be expected to be routed through the UK or how much more tax the company will pay to HM Revenue & Customs as a result of the move.

The scale of any additional payment will not become apparent until HMRC assesses its corporation tax liabilities in 2017. Smaller advertisers who book advertising space online will continue to receive invoices from the Republic.

Alex Cobham, director of research at the Tax Justice Network, said that Facebook’s announcement “raises more questions than answers” and had simply confirmed that international corporation tax rules were “a mess”.

“Facebook’s decision to allocate UK sales to major advertisers to its UK operation for tax purposes suggests that HMRC is completely unable to enforce corporate tax on major multinationals,” said Mr Cobham.

“Multinationals must be taxed on a unitary basis, recognising that they maximise profits at the global level and then apportioning those global profits between countries according to where the real economic activity takes place. Pretending that an entity like Facebook UK is operating independently from the rest of Facebook, maximising UK profit on its own, is absurd.”

“The work of the Public Accounts Committee and continuing high levels of public anger about the behaviour of some corporations have done much to move these issues up the political agenda and we will see the effects of Facebook’s new arrangements in due course,” said Ms Hillier.

“We remain concerned that in the balance of power between corporations and HMRC, corporations have more weight.

“Our committee would reiterate its call for HMRC to take a lead in reforming international tax rules and to work with overseas tax authorities to secure lasting change in the international tax system.”