Tax Research UK doesn't like the Laffer Curve

So it seems that Eire's regime of low corporation tax has caused Facebook to locate its EMEA headquarters there and book most of the advertising sales through the country:

The British arm paid its 90 UK-based staff an average of £275,000 each in 2011 while contributing just £195,890 to the Treasury's coffers, according to the firm's latest accounts filed at Companies House.
The website also reported UK revenues of £20.4m, a fraction of the £175m that media analysts estimate the firm made in the UK in 2011.
I'd imagine that if the UK sales staff are managed and paid by a Dublin-based senior Facebook salesweasel, and the sales contracts are drawn up in Dublin, then the UK Inland Revenue is just going to have to suck this one up. Oh, if only the UK had a lower corporation tax rate so that the extra costs and inconvenience to Facebook of this arrangement weren't outweighed by the painfully higher rate of UK corporation tax...

It seems that Richard Murphy of Tax Research UK is not happy about the implications of this:

"The UK is being taken for a ride. Facebook is taking standard practice for these IT companies to a new high, or low, depending on how you look at it. The UK is giving the tax break and the Irish get benefit of all the tax on the sales."
Yup, that's right, Richard. Standard and (this is important) completely legal. If the UK Government wants to encourage corporations to base their legal entities in the UK, all they have to do is be more competitive with Ireland. Perhaps they have decided that the income from less mobile entities outweighs the potential extra income from mobile entities like Facebook, in which case they can just take it like a man (who came up with that saying? men are the biggest bunch of wusses that I know).

But there's more!

Facebook UK's latest figures show that the company charged £15.4m to its 2011 accounts – which can be used to reduce future tax bills – as a cost of awarding its UK staff share options. Murphy said: "That appears to be £15.4m to reward £20.4m in sales. That makes no sense."
Really? That's not £20.4m of sales; it's £20.4m of UK revenue plus additional sales booked through Ireland. It makes perfect sense. Let's suppose that a major bank has IT operations in London and New York. Most of the data processing is done in and for the benefit of New York. An IT engineer in London comes up with a way of improving the utilisation of the bank's servers - from, say, 40% to 50%. That saves the bank $1m dollars per year, but only $100K of that is saved by the smaller UK-based trading desks. The bank pays the engineer a $200K bonus, $100K more than the UK savings. Does that make no sense?

I'm glad that Richard Murphy isn't a chartered accountant or some other profession that requires basic numeracy...


  1. I presume that any VAT collected on sales in the UK will have been passed to HMRC?

  2. Interesting question, Paul; is advertising VATable? I don't know; anyone better informed on this?

    Certainly the employee/employer NI and employee income tax is all paid to the UK, and for a wage bill of £25mm and an average tax rate of, say, 40% tax + 12% ER NI + 2% EE NI that's a cool £13mm to Government coffers.


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