HMRC: The Data, The Updates, and Your Tax Position

TITLE: HMRC's AI Transparency Problem: A Glitch in the Matrix?

Let's talk about HM Revenue & Customs (HMRC), the UK's tax authority, and their increasingly opaque relationship with Artificial Intelligence. It's a situation that should make anyone who pays taxes in the UK—which, last I checked, is pretty much everyone—sit up and pay attention.

The Algorithmic Black Box

The core issue stems from a recent ruling by the First-Tier Tribunal regarding HMRC's use of AI in processing R&D Tax Credit claims. A tax practitioner filed a Freedom of Information Act (FOIA) request seeking details about the AI models used, data security measures, and internal policies. Initially, HMRC refused, then shifted to a "neither confirm nor deny" stance, arguing that even acknowledging the existence of such AI tools would aid fraudsters.

The Tribunal overturned this decision, stating that HMRC's position was "untenable" and undermined public trust. They felt the ICO had over-emphasized the "unsubstantiated and unevidenced" risks of fraud. The Tribunal also highlighted the global concern around AI's role in decision-making.

Now, I've seen this kind of bureaucratic stonewalling before. It's rarely a sign of competence. What makes this particularly concerning is the specific context: R&D Tax Credits. These credits are designed to incentivize innovation by rewarding companies that invest in scientific or technological advancements. HMRC's own figures estimate a multiplier effect of up to 300% on R&D investment for every pound spent on tax relief. However, the system has been plagued by abuse, with HMRC estimating that almost 25% of SME claims were erroneous or fraudulent (this was in the now reformed SME scheme).

So, on one hand, you have a potentially powerful tool for economic growth being undermined by fraud. On the other, you have the tax authority deploying AI to combat this fraud, but refusing to be transparent about how that AI works. It’s a classic black box scenario.

The Human Cost of Automation

And here's where things get really interesting. Consider the letter to the editor published in The Guardian from Dr. Susan Treagus. She recounts how, shortly after her husband's death, HMRC's automated system incorrectly calculated her income, nearly halving her pension. The system, based on electronic transfers in and out of her account, flagged her as having an income over £100,000.

This wasn't a human error, apparently, but a "computer-generated" miscalculation that arrived without explanation. Dr. Treagus rightly points out that if she hadn't been financially literate, this error might have gone uncorrected for months, maybe years.

I've looked at hundreds of these cases, and this kind of algorithmic overreach is becoming increasingly common. It's not just about R&D Tax Credits or bereavement penalties. It's about the potential for AI to inflict real financial harm on ordinary citizens, often without any human oversight or recourse.

What criteria were used to select the AI models? What measures are in place to ensure the privacy and security of taxpayer data? What policies and procedures govern the use of AI models? These are the questions the tax practitioner asked in their FOIA request, and these are the questions HMRC seems determined to avoid answering.

The question is: If HMRC is using AI to make decisions that affect people's lives and livelihoods, shouldn't those people have the right to understand how those decisions are being made?

The Future Is Algorithmic. Is It Fair?

The trend is clear: tax authorities worldwide are embracing AI. The OECD reports that 70% of global tax authorities already use AI in their operations. This number will only increase. The problem isn't the use of AI itself, but the lack of transparency surrounding its use.

UK tax administration operates under a statutory regime legislated in 1970. As the article from When Tax Meets Automation: Lessons From HMRC's Use (Or Not) Of Artificial Intelligence rightly notes, the march of GenAI into tax practice only increases the sense that reform is overdue.

It's unrealistic to expect regulatory agencies not to use AI. However, it's also unreasonable for those agencies to be opaque about their AI use, especially when the technology is used to make decisions.

Is HMRC Playing Hide-and-Seek With the Truth?

The HMRC's lack of transparency around its AI usage isn't just a bureaucratic quirk. It's a potential threat to fairness and accountability. The agency's initial confirmation, followed by a "neither confirm nor deny" response, is, as the Tribunal said, "like trying to force the genie back in its bottle." It raises serious questions about what they're trying to hide—and who will pay the price for their secrecy.