Facebook is to see its UK tax bill increase by millions of pounds following a huge reform of its tax practices. The social networking giant implemented the reforms following heavy criticism of the practices it uses to minimise the amount of tax it pays on its UK advertising revenue.
Previously Facebook, like a number of other major companies, used complex business structures to divert its UK profits through overseas offices. As such, though the profits were generated in the UK, they were largely recorded as taking place overseas. Effective rates of tax paid to the UK government by multinational companies using these tactics can be extremely small, with tax on UK profits instead being paid in other jurisdictions that offer lower rates of corporation tax.
The announcement that Facebook will be paying more UK tax follows not long after another company that has used similar tactics, Google, attracted fresh controversy. The search specialist reached a deal with the UK government which saw it continue to pay very low effective rates of corporation tax, leading some to accuse the government of offering “mates’ rates.”
Facebook was diverting profits for advertising revenue generated from sales to many of its biggest advertisers through Ireland, a jurisdiction also favoured by many companies using similar tactics such as Google. This included revenue generated through advertising for large-scale businesses such as Sainsbury’s, Tesco, WPP – a major advertising specialist – and Unilever.
Advertising sales from smaller businesses will still be routed through the company’s international headquarters in Ireland when advertising is booked online without significant involvement from Facebook staff. However, the decision to cease this practice with regard to the bigger advertisers will see the full rate of UK corporation tax paid on the majority of the company’s UK profits. The resultant increase in the company’s tax bill for its UK operations is expected to reach into the millions.
Facebook is one of a number of multinational companies to attract criticism for avoiding UK tax on its earnings. Facebook is a multi-billion pound company, usually taking only around three months to generate in excess of £1 billion in profit. While it is not known exactly how much of this comes from UK revenue, it is known that the UK is one of the company’s biggest markets. In spite of this, it was revealed late last year that Facebook’s total corporation tax bill for 2014 came to just £4,327.
The changes to Facebook’s tax structure will take effect in April as the new tax year begins. As a result, the company’s first tax bill under the new arrangement will be payable next year.