Re: So are they breaking the law or not?
No-one actually knows. Until you take it to a tax tribunal, appeals and then potentially Judicial Review (all at vast cost/profit to m'learned friends) all you've got are opinions of varying levels of mendacity.
Unless you're prepared to threaten retrospective legislation there is the real possibility of going after Google for a lot more money, losing and getting nailed for both your own legal costs and theirs.
This sort of law is essentially Poker and HMRC vs. Google is a no limits game between the highest of high rollers. Such players generally avoid each other for the very good reason that it is too risky and rarely profitable. The "correct" way to play is to get into games with opponents (SMEs) who can't match your resources - then you can buy the game with a big bet and a bluff.
Tax law has damn all to do with finding the truth, being fair or punishing cheats (that's what Criminal Law is for). It is about efficiently hoovering up cash for HMG. That means targeting weak opponents and staking as little Government cash as possible on each hand.