Snapchat's first UK financials show £26 million in revenue and £1.3 million in profit in 2016

Rob Price/BIPeople queuing to buy Snapchat Spectacles.

Snap’s British arm reported £26 million in revenue and £1.3 million in profit in the 15 months to December 2016, according to its first full-year financial filings in the UK. The company paid £360,000 in tax for the period.

The filing shows that the firm had 29 employees in the UK at the time, paid a collective £6.9 million, or an average of around £238,000 each.

A Snap source noted that the remuneration figure included pensions and social security contributions, and covered a 16 month period when the firm went from 0 employees to now 70 in the UK. The person suggested £238,000 isn’t reflective of the true average wage.

Snapchat makes most of its money from advertising, but the filing’s wording suggests its revenue figure for the UK last year doesn’t reflect how many ads it sold. That makes it difficult to assess how well the firm’s first year in the UK and Europe up against Facebook and Google has gone.

Instead, the 2016 revenue figure appears to be booked through other, unspecified Snap subsidiaries. Snap’s UK revenue reflects the British entity charging its costs back, plus a markup.

This is a controversial setup known as “transfer pricing”, and is similar to how Amazon, Facebook, and Google report revenue in the UK.

Snapchat UKBusiness InsiderSnap’s UK business doesn’t reflect how much money it makes from ads.

A Snap source disputed a direct comparison to Facebook, Google, and Amazon, saying the company didn’t book UK sales revenue thorugh a European office in a low-tax region such as Ireland or Luxembourg. Instead, the US parent company Snap Inc. booked UK revenue and the local arm was remunerated. The setup was due to the fact the UK arm was so new and lacked the infrastructure to book local advertising revenues locally, the person said.

Snap announced in January this year – after the financial period reflected in its filing – that it would make the UK its international hub outside the US. It has also started billing all ad revenue for the UK and some other markets through the UK entity. This essentially means Snap will drop the transfer pricing structure in the UK for 2017, and likely pay more tax.

SnapchatBusiness InsiderThis section of Snap’s filing suggests it will drop a controversial transfer pricing arrangement.

A Snap spokeswoman said the firm believed in doing business in a transparent way, and that the firm wanted to pay tax in the countries where it does business. While the firm largely wants to book local ad revenues through local offices, it isn’t always possible in newly established markets with smaller teams.

According to the filing, the UK business also makes some money from Snapchat’s video-capturing Spectacles, which went on sale in late 2016. It reports into its US parent, Snap Inc., which is registered in Delaware.

Snap set up shop in London in late 2015, and appointed former Facebook executive Claire Valoti to head up its UK business.

Like its US parent, Snap’s UK business involves selling sponsored lenses, video ads, and other native ad formats to brands.

It’s up against the duopoly of Facebook and Google, which command the bulk of digital ad spend in the UK. Agency sources speaking to Business Insider suggest Snap has yet to make much of a dent. The CEO of the world’s biggest agency holding company, WPP’s Martin Sorrell, said his firm plans to spend $US200 million (£150 million) on Snapchat ads in 2017. That’s still a tiny portion, compared to the $US5 billion (£3.8 billion) it spent on Google and the $US1.7 billion (£1.3 billion) it spent on Facebook last year.

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