Facebook’s Tax Affairs Under Scrutiny

Facebook is the latest global organization to come under scrutiny from the HMRC regarding its tax affairs after reportedly channeling £440 million into an offshore company in order to avoid making tax payments in the United Kingdom. Facebook reported profits in excess of £800 million in 2011 but only paid £2.9 million corporation tax, including less than £240,000 in Britain, according to The Sunday Times.

The Group’s overseas headquarters are situated in Ireland which serves to reduce their taxable profits in the UK. Profits are also channeled through a subsidiary in the Cayman Islands. Both countries have a lower rate of tax than in the UK. Similar practices have been used by Google, Apple and Starbucks.

In October, Starbucks was criticized heavily in the media for paying only £8.6 million tax on more than £3 billion sales in 14 years of trading in Britain. Starbucks reportedly paid no tax in the UK over the past 3 years. Starbucks subsequently announced its intentions to pay approximately £10 million corporation tax in each of the next 2 years in order to restore its image with the public.

Chancellor George Osborne said the Government was clamping down on corporate tax avoidance in his Autumn Statement earlier in December. The Chancellor has indicated that more resources will be put into place ensuring multinational companies ‘pay their proper share of taxes’. Over £154million has been earmarked to tackle the problem of tax avoidance and evasion, with HMRC hiring another 2,500 tax inspectors to target the high earners who avoid tax.

The HMRC clampdown on multinationals is unlikely to generate significant income for the Chancellor as big businesses are able to hire top lawyers and advisors in their defense. Given the major budget deficit in the UK, it is likely that attention will be directed towards smaller individuals and businesses who are easier targets. UK contractors and small businesses are advised to ensure their financial affairs are in order. Individuals with offshore structures are more likely to be exposed to any new policies adopted by the Exchequer.

Belsize Accountancy do not employ offshore structuring. We believe that there is no longer a significant difference between effective UK tax planning and offshore alternatives. Contractors operating through effective UK structures will be able to reduce their marginal rate of tax without having to worry about the uncertainty of locating their business offshore.