Search giant Google avoided paying up to £450m in UK taxes last year because its £1.6bn British advertising earnings were funnelled through its Irish subsidiary, according to the company's accounts.
Google's annual report showed that the UK is the company's largest market outside the US - accounting for 14 percent of its $21.8bn (£13.5bn) worldwide revenues last year.
But Google UK's turnover is reported as £150m because UK advertising revenues are channelled through Google's Ireland-based subsidiary. Corporation tax in Ireland is between 10 percent and 25 percent; in Britain it's between 28 percent and 30 percent.
This move - known as 'transfer pricing' - is entirely legal and allowed Google to report a pretax loss of £26m for the period.
Vince Cable, deputy leader of the Liberal Democrats, told the Sunday Times that the revelation could severely damage Google's reputation.
"Avoidance like this is hard to stomach at the best of times," said Vince Cable. "But when the country is in recession and everyone is feeling the pain, it really sticks in the throat - it means higher taxes for the rest of us."
Defending the search giant, Google spokesman Peter Barron said: "Google makes a big investment in the UK, with more than 800 employees, and we make a substantial contribution to local and national taxation.
"But the fact is that our European headquarters is in Dublin. We comply fully with the tax laws in all the countries in which we operate."