Vodafone made a previously unreported multimillion-pound settlement with HM Revenue & Customs in the wake of a dispute over the tax paid by an Irish subsidiary created to collect royalty payments for using its brand.

The UK-based mobile phone group used an Irish subsidiary, which employed no staff between 2002 and 2007, to collect hundreds of millions of pounds a year in royalty payments from operating companies and joint ventures around the world.

By 2007, Vodafone Ireland Marketing Ltd, a company registered to an industrial estate in the Dublin suburb of Leopardstown, was reporting a turnover of €380 million (£320 million) a year.

During a four-year period, these royalty payments, collected from most countries except the UK and Italy, have helped Vodafone send more than €1 billion worth of dividends to the low tax jurisdiction of Luxembourg from Dublin. The dividends, which include a final payment of €142 million due to be delivered this year, came from profits made after taking advantage of Ireland's low corporation tax rates.

In an arrangement which echoes those made by Apple in Ireland, Vodafone moved senior marketing managers to Dublin to protect global royalty revenues from UK taxation, and trigger a lower Irish corporation tax bill from 25 per cent to 12.5 per cent of profits. This was significantly lower than the UK corporation tax rate, which between 2008 and 2010 was 28 per cent of profits.

Accounts filed in Dublin show that in 2009, HMRC settled a dispute with Vodafone over its Irish tax returns. The overall size of the settlement has not been revealed, but it involved Vodafone reclaiming €67 million from the Irish government in tax that should have been paid in the UK. Vodafone, the world’s second largest mobile phone company by revenue, has paid no corporation tax in Britain for two successive years, despite paying £2.6 billion in international taxes in 2012.

The company confirmed its Irish settlement had never been separately disclosed in its annual reports, and was not connected to a £1.25bn payment to HM Revenue and Customs in 2010 to settle a much publicised dispute over the use of a Luxembourg subsidiary.

A spokesman for HMRC refused to confirm whether any settlement over Vodafone’s Irish tax affairs had been made, saying it was prevented by law from discussing the affairs of individual taxpayers.

Vodafone went to great lengths to protect its Irish income, eventually relocating a section of its global marketing team from the UK to Dublin in 2007. The transferred staff were responsible for handling such high profile sponsorships as the operator’s longstanding deal with Formula 1 and the Champions League.

The Irish brand subsidiary was wound down after the staff were brought back to the UK in 2011. According to a company spokesman the unit’s activities have transferred to a UK company which pays all its profits into the British plc and is taxed under UK rules.

The disclosure comes as MPs revealed the British mobile phone group, which is under fire for its minimal corporation tax payments in this country, has emerged as the largest supplier of mobile phones to the government. More than 30 departments and public bodies, including the prime minister’s office, have signed contracts worth £14m a year with Vodafone.

In a stand against tax avoidance, ministers updated laws in April to ensure companies whose tax returns have been challenged by HM Revenue & Customs on grounds of tax abuse can be disqualified from working for the government.

Vodafone strongly rejected any suggestion of tax avoidance and said there have been no allegations of wrongdoing from HMRC. The company said its disputes with the UK taxman over its tax arrangements in Ireland and Luxembourg would not block it from government contracts under current rules, but MPs argued there was a principle at stake.

"The fact that government departments are using companies which have been challenged about the tax they owe clearly shows that current tax laws need reform," said Labour MP Pamela Nash, whose parliamentary questions helped reveal the extent of Vodafone's government work.

The rules which eventually came into force have been described by tax experts as narrow in scope, and Vodafone says they would not have applied to its HMRC settlements, even if they had been in force at the time.

“Vodafone has long been a major supplier to central UK government departments and we have always complied in full with all procurement criteria defined by government,” the company said in a written statement.

“In all respects and at every point, Vodafone has conducted itself with the highest integrity and in full compliance with the law.”

Vodafone's status as the dominant supplier of mobile phones to government departments was exposed by a series of parliamentary questions asked by Conservative and Labour MPs. Questions were put by Nash, by Labour MPs Dai Havard and Jenny Chapman, and Tory MPs Gary Streeter and Mike Freer.

Steve Barclay, a member of the Commons Public Accounts Committee, which has previously tackled Vodafone's tax affairs, said: "The government now needs to close any existing tax loopholes to ensure that large companies, such as Vodafone, are not legally able to avoid paying their fair share of tax. The need for swift action is particularly highlighted when it is public money that is paying for these substantial contracts with private companies."

Vodafone is the largest or only mobile supplier to a raft of departments, including the Cabinet Office, which covers David Cameron and Nick Clegg's offices, the Treasury, including HMRC, the Department for Business, Innovation and Skills, the Ministry of Defence, the Department of Health, and the Department for Work and Pensions.

Many of the contracts are based on commercial terms agreed between the Cabinet Office and Vodafone in a Memorandum of Understanding that runs from 2010 to 2014. While rival networks EE and O2 have some government work, EE is pushing for more open competition in the awarding of mobile contracts by ministries.

A Cabinet Office spokeswoman said: “Since 2010 we’ve radically changed the way government buys goods and services to make the most of our unique buying power.

“Last year alone these reforms saved taxpayers £800 million by renegotiating contracts with our largest suppliers, of which Vodafone is one.

“We are determined to continue to increase competition and innovation amongst a range of suppliers to make sure that every option to cut waste and make savings are explored, especially when opportunities to review large-scale contracts arise.”

Chief secretary to the Treasury Danny Alexander launched an overhaul of the rules around government contracts last year, saying "taxpayers' money should not be funding tax dodgers".

Guardian