Google, which has an estimated 90% market share of UK internet searches, last year used a cross-border network of subsidiary companies to ensure it did not pay a penny in corporation tax on its £1.6bn advertising revenues in Britain.

The international corporate structure enables Google to avoid paying what could otherwise have been a corporation tax bill in the UK of as much as £450m.

Recently filed accounts for subsidiary company Google UK Limited show none of the search engine's advertising revenues from British customers were accounted for in the business, despite operations in London and Manchester incurring "administrative expenses" of £177m last year, including a wage bill of £70m.

While much of the costs linked to the running of Google's British operations are recognised for tax purposes in the UK; revenues from customers in Britain, however, are diverted to another Google company in Ireland, where the corporation tax rate is between 10% and 25%. British corporation tax is levied at between 28% and 30%.

The accounts for Google UK describe its principal activity as "the provision of marketing services to Google Ireland Limited and the provision of research and development services to [US parent company] Google Inc".

As a result Google UK reports turnover of £150m and a pretax loss of £26m. By contrast, Google Inc's annual report showed 14% of the company's $21.8bn (£13.5bn) revenues came from the UK, making it the largest market outside of the US.

Multinational companies engaged in so-called "transfer pricing" – where expenses are booked in high tax jurisdictions and earnings in low tax areas — are seen by many anti-avoidance campaigners as presenting one of the biggest challenges to the already strained exchequer.

Such transfer pricing arrangements must have the agreement of tax authorities in the UK and are entirely legal. They are commonplace in many industries other than advertising, from pharmaceuticals to bananas. Multinationals with significant intellectual property – such as Google and Microsoft – are particular well placed to transfer revenues to the most advantageous tax regimes because they are able to charge inter-group companies significant royalty payments.

Tax expert and anti-avoidance campaigner Richard Murphy said: "This indicates a pattern of tax avoidance by Google suggesting they are dedicated to minimising corporation tax on profits arising outside of the US."

Over the weekend, Vince Cable, deputy leader of the Liberal Democrats, urged Google to pay "its fair share" and warned that it risked damage to its reputation. "Avoidance like this is hard to stomach at the best of times, 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".

Google, which was built on a motto "don't be evil", said: "It would be wrong to think of Google's revenues from UK advertisers as solely the result of operations carried out locally. We invest in R&D, data centres and other infrastructure on a global basis, and that then helps generate revenue in different countries."

A spokesman pointed out that Google employs more than 800 staff in the UK, making a "substantial contribution" through payroll and other taxes. He added that Dublin was Google's European headquarters, pooling revenues from across the continent, not just the UK. He said the competitive tax environment was just one reason why Google, like many other multinationals, had chosen Dublin for its European base.

The smallprint of the 2008 annual report for Google Inc, which is registered in Delaware, reveals that despite the search engine's international reach, its two major tax jurisdictions are the US and Ireland. "We and our subsidiaries are routinely examined by various taxing authorities," it states, confirming Irish officials are examining tax years 2002 to 2008.