The UK is the only region besides the US for which Google breaks out revenue in its quarterly earnings, because – for whatever reason – the UK represents 10% or more of Google’s total revenue. (Public companies are generally obliged to cite countries or regions which generate more than 10% of revenue in their results.)
Google doesn’t, however, break out profits for any region; it just gives a single figure for operating and net profit.
Update: note that this post doesn’t take into account any of the amazing workarounds that companies use to shift “activity” from one place to another; for example, Google doesn’t even accept that it has a “place of activity” in the UK. For instance, look at Jolyon Maugham’s analysis, and especially the comments that follow it.
But what if we were to try to estimate (in a fag-packet way) how much profit Google has made in the UK, and then compare that to the tax it has paid, and the tax that it recently paid in a settlement with the UK’s tax authorities, HM Revenue & Customs?
Tax, of course, is payable on profit, not revenue. And it’s helpful too to compare Google with other UK media companies which sell advertising and have other activities.
So take a look at the tax paid by another UK-based media company of comparable size – ITV.
ITV’s interim results (for the six months to end June 2015) show six-month revenues of £1.53bn, with profit before tax of £391m, compared to profits for the same period in 2014 of £312m. And here’s the profit before tax figures (for six months).
On which it paid tax of £81m (first six months of 2015) and £64m (first six months of 2014) – an effective tax rate, as it points out, of 21%.
Now let’s move on to Google. Its UK revenues are as follows – all given in US$:
Note that these are a LOT more than ITV’s. But how do we get from this to its profits? The simple way is just to adopt the overall profitability of Google, the corporation. As a rough-and-ready way of approaching Google’s UK profits, it will have to suffice. The UK doesn’t have the expense of the “moonshot” operations such as self-driving cars; most of the activity is around advertising, though there is also an Android development team (whose work is allegedly actually “happening” in California for tax purposes) and various building works which will all affect immediate profitability because they’re expensive.
But let’s try anyway. Let’s use Google’s overall operating profit margin for each quarter, and use that to calculate the UK profits. It’s not perfect, but it’s a start.
I’ve done that in the table below, using the data from Google’s accounts, and its operating profit/revenue (hence operating profitability margin) to calculate a notional profit; then I’ve multiplied by the prevailing exchange rate (which has varied a lot over the years); and then I’ve multiplied the notional profit by 21% to get the “tax payable”.
The numbers are staggering. Google’s UK division has probably made profits of more than 7 billion pounds since the fourth quarter of 2005 (which I used simply because I couldn’t get exchange rates going further back) on revenues (stated) of $39bn – generating an assumed profit of $11.56bn, or £7.11bn.
And the tax payable on that amount? Assuming that same 21% rate as ITV, the total tax payable would be just short of £1.5bn.
And.. how much tax has Google paid in the UK?
The latest stories to emerge of the deal with HMRC suggest that Google is paying back tax to cover just that period to 2005.
“We have agreed with HMRC a new approach for our UK taxes and will pay £130m, covering taxes since 2005,” a Google spokesman said. “We will now pay tax based on revenue from UK-based advertisers, which reflects the size and scope of our UK business.”
How much tax has Google paid in the UK? A total of £200m if you include this latest £130m amount, apparently. Which works out to a tax payment rate of 2.8%. Sure, there may have been lots and lots of costs involved in setting up Google, which are offset against tax. But I doubt they’re bigger than ITV, for instance, has to pay.
Google’s deal with HMRC has been called “derisory”. The figures here suggest that that description is absolutely correct. If Google is generating this much revenue in the UK – a fact which it states in its earnings reports, for which its executives are legally liable – then it would be terrific if it could explain quite how it is so dramatically expensive to run such a business that it generates such pitiful profits. Update: the explanation given by tax experts is that the revenues are *generated* in the UK, but *booked* in Ireland, so that the “profit” arises in Ireland, which doesn’t tax it. This “generated in UK but booked in Ireland” point is the one which led to an almighty furore in 2013 when Matt Brittin of Google
stood by evidence he gave last year that all the company’s European sales were routed through its operation in Ireland and so were not liable to UK taxes.
To which the committee chairman, Margaret Hodge, responded:
“You are a company that says you do no evil and I think that you do do evil in that you use smoke and mirrors to avoid paying tax.”
Among the criticisms of the deal with HMRC are that it must have been done with some sort of principle in the minds of those who agreed the deal for HMRC – in which case it would be useful for other companies to know what principles exactly are in play. It’s time for transparency on this.