Facebook may pay no extra tax for years, experts warn – as it 'sits on £21.4 million it could use to offset bill'

Exclusive: Massive sum in deferred tax relief means new deal could result in nothing extra being paid out to Treasury

(AFP)

Facebook may pay little or nothing in additional tax to the Treasury for years despite its announcement that it is overhauling its corporate structure to create “greater transparency” about its tax affairs in Britain, The Independent can reveal.

The social media giant, which generates global profits of £1bn every three months, said it was voluntarily changing its policy so revenues from its largest UK advertisers will no longer be routed through Ireland. The move will generate higher taxable profits in Britain potentially worth millions to HM Revenue and Customs as the company seeks to defang criticism of tax avoidance by some of the world’s largest corporations.

But experts warned that Chancellor George Osborne may have to wait for years to see a penny in extra corporation tax from Facebook because it is sitting on £21.4m in deferred tax relief which it could use to offset future bills from the HMRC.

According to one estimate provided to The Independent, royalties paid by Facebook’s subsidiaries to its parent company mean that its UK tax bill could amount to as little as £4m a year under the new structure.

Along with other US tech giants Google, Apple and Amazon - and global brands such as Starbucks - Facebook has provoked public anger with revelations about the strategies used to minimise its tax liabilities while generating billions of pounds in profit.

It emerged last October that the California-based social network paid just £4,327 in UK corporation tax in 2014, despite Britain being one of the company’s largest markets outside the United States. Its 2014 tax payment was less than the sum paid in income tax and National Insurance by the average British employee - and six times less than the £27,000 paid by the HMRC to Facebook to place ads urging people to pay their taxes.

Under the new arrangement, Facebook has agreed to pay UK corporation tax at 20 per cent on revenue generated by sales from its larger advertisers - firms including Tesco, Sainsbury’s and advertising giant WPP - rather than routing those sales through Ireland, which has a corporation tax rate of 12.5 per cent. Automated sales of advertising space to smaller UK companies, which Facebook acknowledged last month was the method used by the majority of its marketing customers, will continue to be routed through Ireland.

The company’s UK arm let it be known that it nonetheless expected its move to add significantly to the advertising revenues booked by its British operations, which according to one estimate last year stood at £800m.

The Treasury insisted that a punitive 25 per cent “diverted profits tax” introduced by Mr Osborne last year to tackle the use of “contrived” techniques by multinationals to move profits out of Britain was “starting to have an impact”.

In a statement, Facebook said: “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.”

But a leading taxation lawyer and advisor to former Labour leader Ed Miliband warned that deferred tax reliefs in the company’s most recent accounts - £9.7m in losses carried forward and £11.4m linked to share-based payments - mean Facebook has the potential to use those sums to be offset against its tax bill for 2017 and beyond.

Jolyon Maugham QC, who advised Labour on its non-dom tax policy at the last election, said: “Previously Facebook UK didn’t bother with these sums, which effectively comprise rights to reduce future tax bills, as assets because they didn’t think they’d ever have any UK corporation tax liability to pay. “This might now change but, regardless, we should expect it to be a good while before this deal results in any real cash moving from Facebook UK to HMRC.”

A senior accountant said an analysis of Facebook’s accounts in Ireland showed it was recording a profit of one per cent on its sales, which if translated to its UK activities would produce a highly modest windfall for the Treasury.

Tim Davies, head of tax at international accountants Mazars said: “There are lots of reasons why this might not turn into the big tax win it seems on first sight. Judging by the Irish business, after paying its royalties, the profit margin of Facebook is about one per cent of sales. That could translate in the UK to as little as £4m-£6m a year to the taxman.”

The Irish tax loophole used by multinational companies is being closed for new arrivals in 2019, but firms already based there will be allowed to continue using it.

She said: “So actually all they’re doing is pre-empting that, bringing it forward for a bit of a PR stunt.”

The controversy will increase pressure on the Government to re-examine the deal struck between the HMRC and Google in January, which saw the search giant pay £130m in back taxes dating to 2005. MPs said last week they were unconvinced that the payment from Google, which had a turnover of £3.8bn in the UK in 2013, was “fair” to taxpayers.

Campaigners and opposition politicians said the fact that Facebook was volunteering to pay additional tax also proved the need for an overhaul of the corporation tax system not only in Britain but across the developed world.

Jonathan Isaby, director of the right-leaning TaxPayers’ Alliance, said: “The fact that Facebook has taken a voluntary decision to change its structure so it pays more corporation tax just goes to show how absurd the system has become. The out-dated tax system is simply not suitable for the modern, global economy and leaves the tax liabilities of multi-nationals open to honest dispute.”

John McDonnell, the Shadow Chancellor, added: “The truth is that the Chancellor has allowed a situation where some companies feel they can pay what they want when they want.”

The HMRC, which is understood to have approved the new Facebook arrangement and accepted that the social network will now not fall under the new diverted profits tax, defended its record.

A spokesman said: “We do not comment on individual taxpayers. But HMRC ensures that all multinationals pay the tax due under UK law and we do not settle for a penny less.”