Netflix disclosed that its UK tax position is “under examination” by HMRC, in its submission to regulators in America. The Times revealed that Netflix Services UK Ltd. only declared a profit of £1.12m last year. Considering that it has nine million British subscribers, this doesn’t quite add up.

What’s the problem with Netflix’s figures?

The main problem here is the difference between how much Netflix actually makes in the UK and how much of that is declared as UK income.

Netflix declared £23.9m UK revenue last year. Its nine million subscribers pay a minimum of £5.99 per month for the basic package. That’s £54m every month and £647m for the year. Quite a difference between £647m and £23.9m. Their actual takings are definitely more, because some of their customers will be paying the £9.99 per monthly package rate.

How can they get out of paying tax on their UK earnings?

This is a complex question to answer because the company are not breaking the law.  Netflix Services UK Ltd. Is a subsidiary company of their main European parent company Netflix International BV. This European section of Netflix is based in Amsterdam and is subject to Dutch tax laws. It is thought that many global companies are based in The Netherlands, or Ireland, because they end up with a more favourable tax position.

Your Netflix subscription payment is officially taken in The Netherlands, even though you live and use the service in Britain. This kind of arrangement between a parent company based abroad and its British subsidiary is called a transfer pricing deal. HMRC’s Netflix investigation may consider the implications of the current deal and possibly suggest an increase to the British revenue level.

What do Netflix say?

Netflix say that they are “engaged with” HMRC on this “standard review” of their books. They also point out that: ”Netflix is contributing to the UK economy in many different ways. The provision of our service to UK-based subscribers results in significant amounts of VAT for the UK government.”

They also said: “We are also investing hundreds of millions directly in the UK entertainment industry, with close to 40 projects underway this year including new seasons of The Crown and Black Mirror and co-productions with British broadcasters.”

What do HMRC have to say?

Rather unsurprisingly, an HMRC spokesperson was unable to discuss any details about the investigation. Quoted in Economia, they said: “We do not comment on identifiable taxpayers. HMRC has a very strong track record on challenging contrived tax arrangements. We make sure that large businesses, just like everyone else, pay all the taxes due under UK law and we don’t settle for less.”

HMRC have recouped approximately £62bn over the last ten years from large businesses’ tax payments. They are continually investigating half of our big businesses to make sure that our Treasury is getting its fair share of global business.