How to pay tax like Google

Google has come under fire for paying so little tax. But are there tricks it uses that you can employ to cut your tax bill? Or is it wrong to do so?

Google has grown to become the world's biggest search engine by far. Today, Google is a $300 billion business employing more than 30,000 people in 40 countries around the globe.

Despite its dominance, Google has come under sustained attack in Britain because of its reluctance to pay Corporation Tax. Rather than book its advertising sales in the UK, Google funnels these revenues through its Dublin office. Doing this massively reduces company taxation, which is why Google paid a mere £10 million in Corporation Tax from 2006 to 2011.

As a result, the search giant has been criticised harshly by MPs. Parliamentarians claim that, contrary to its company motto of 'Do no evil', Google acts unethically when it comes to its UK tax affairs.

How big businesses dodge tax

How do multinational businesses with large UK operations avoid British taxes? The answer is very simple: they minimise revenues in high-tax locations by booking these sales through low-tax states. At the same time, they funnel expenses into high-tax countries, cutting company taxes to the bone.

This 'transfer pricing' is a doddle for internet-based companies, as they are highly skilled at deciding where to book their revenues. While Google funnels its UK sales through Ireland, Amazon books UK revenues worth billions of pounds of a year through a subsidiary in low-tax Luxembourg.

Despite having a large network of UK coffee shops, Starbucks uses similar accounting tricks to minimise UK company taxes. Its UK operation pays hefty royalty fees to subsidiaries based in overseas tax havens and also pays millions in interest on huge inter-company loans to wipe out its liability to Corporation Tax.

How to legally dodge tax

Of course, those of us living and working in the UK don't have the same opportunities to avoid paying tax.

That's because businesses are taxed on their profits (sales minus expenses), while individuals are taxed on their incomes. This means that most British workers have no option but to pay Income Tax and National Insurance contributions (NICs) through PAYE: the Pay As You Earn tax system that deducts tax 'at source'.

While business can offset various costs against their earnings (rents, staff wages, debt interest and so on), employees cannot. Self-employed traders can legitimately offset their business expenses against tax, but rarely to the same extent that big businesses get away with.

Nevertheless, how low could your tax bill go? What steps could you take to minimise your contribution to the UK's upkeep? And is it moral for you to do so? Here are five ideas to slash your tax bill to the minimum:

1. Pump up your pension

The easiest way to reduce your taxable income is to contribute more to a company or personal pension. These pension payments attract tax relief at your highest rate (which could be 20%, 40% or 45%). For a basic-rate taxpayer, a £100 contribution into a pension turns into £125 on day one, thanks to 20% tax relief.

In effect, paying more into your pension pushes some of your current income into the future, while generating tax savings today. This and other tax breaks make pensions a popular vehicle for retirement saving.

2. Open an ISA

The ISA (Individual Savings Account) is the UK's most popular tax shelter, used by 20 million Brits to avoid tax on savings and investments.

By putting cash, shares, bonds and other assets into an ISA, you can avoid tax on the income (savings interest, share dividends and bond coupons) and capital gains (profits made on selling) generated by these assets. An ISA should be the first port of call for British savers and investors looking to earn tax-free returns.

You can see the best ISAs available today in The best Cash ISAs.

3. Use childcare vouchers

Parents paying childcare costs for children under 16 can save thousands of pounds a year in tax by sacrificing part of their earnings in return for tax-free childcare vouchers. These vouchers allow parents to pay for childcare from before-tax income, producing big savings on Income Tax and NICs.

These vouchers are available only via employers, but thousands of firms offer this tax perk. Two working parents can claim up to £486 a month in childcare vouchers, saving up to £1,860 a year in tax. Check out this calculator to see how much childcare vouchers could save you (and note that getting childcare vouchers may affect your eligibility to receive Child Tax Credit).

4. Claim Gift Aid on donations

When donating to charities, always do so using Gift Aid, a Government-approved scheme giving tax breaks on charitable donations of any size (even £1). Through Gift Aid, a £10 donation to a charity instantly turns into £12.50, thanks to tax relief of 20% of the total.

Higher-rate (40%) and additional-rate (45%) taxpayers can reclaim the difference between their top tax rate and the 20% rate by declaring Gift Aid donations on their tax returns.

5. Set up your own company

Probably the best way to dodge tax legally is to become your own boss and start your own private limited company.

By doing so, you control how much of your company earnings are paid out in salary and in tax-efficient dividends to shareholders. This can massively reduce your liability to income tax and NICs, leaving your company to pay Corporation Tax of just 20% of profits. Also, business expenses such as a company car, property and other day-to-day costs can be offset against tax.

Read Self-employed: how to start your own business for more.

Honest, working folk seem to be easy targets for the taxman, while huge corporations pay taxes as low as 0.1% or even zero. Is this fair or moral? Please share your views in the comments box below!

More on tax:

Five and a half million people paid wrong tax in 2012/13

How to cut your Inheritance Tax bill

How to make sure you're on the right tax code

HMRC names and shames second batch of deliberate tax cheats