How much UK tax would Google pay if it recognized all UK income through Google UK Ltd?

The account filling  for Google UK Ltd with Companies House on April 6 has sparked lots of media reporting about the amount of UK tax paid by UK subsidiary of Alphabet Inc,( Google US parent company) to the HMRC

Media reports are creating a problem here as they look exclusively only  at the results of the UK subsidiary and are therefore meaningless. The headlines that have been picked are these:

  • UK revenue is £ 1.6 billion
  • The average pay of er employee before bonuses was £234,000.
  • After everything is said and done it paid 44m in corporation tax which is £21m  that is less than the prior year.

Now people seem to know that Google has not paid its tax fairly. The increase in wages is a red flag, but there is no proper information in these numbers for people who are trying to calculate how much Google’s tax bill should have paid.

The main problem with these numbers  in isolation are:

  1. The revenue figures do not represent UK activities.
  2. It’s not that impactful but there are intercompany within the cost line.
  3. There is no regional breakdown of turnover.  Companies had to disclose revenue by region. The accounts of Google Ireland Limited do not show any geographic breakdown for its €38 billion revenue in 2018.

With the limitations over the available information – can we estimate that how much Google should be paying UK tax?

Definitely. We could – but we will need to make the following assumptions:

  1. UK generated Alphabet revenue is growing at the same rate since FY2016.
  2. Alphabet’s operating margin is consistent globally.

The last time in its 2016’s annual statement Alphabet inc disclosed the specific number. This shows that the UK turnover was 9% of its $90 billion global revenue or $7.8 billion.

For these estimates, we can assume that UK revenue to 2019 continued to grow at its 2015 and 2016 rates -10%. To find out the impact of fixed rates we translate 2016 back to GBP and then apply to the 10% growth rate for 2017, 2018 and 2019. It estimates 2019 UK sales to be £7bn. Applying all this to UK sales and taking negligible interest and other costs shown in UK accounts.

In line with the assumptions above Google has saved £240m on its UK corporation Google’s tax bill through its system of global recharges.

How much would Digital Services Tax recoup?

On 1 April 2020, the digital service Tax imposes a 2% Tax on revenues of certain online business. The tax for digital services will be charged on the fees generated from UK users. While it not publicly published HRMC should know this from the Google VAT returns.

If we assume the above estimates are correct DST would have netted HMRC £141m meaning that Google would have paid £185m in UK taxes. This shows how DST will regain what the HMRC views as lost taxes.

HMRC’s estimates (below) show that it expects to generate £390m from DST next year so our estimates are not that far off.

Based on rough estimates using historic published data, Google has saved £240million in UK Google’s taxes bills during its 2019 financial year.

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