Government Required to Reveal Role of Artificial Intelligence in Tax Decision-Making Processes
HMRC Ordered to Disclose AI Use in Research and Development Tax Credit Decisions
Following a legal challenge led by tax expert Tom Elsbury, HMRC has been ordered to disclose whether it uses artificial intelligence (AI) in its decision-making processes related to research and development (R&D) tax credits.
The order, which came after a Freedom of Information (FOI) request lodged by Elsbury in December 2023, reflects growing demands for transparency in the use of AI in government decision-making. The ruling was made at a first-tier tribunal, where Judge Alexandra Marks found Elsbury's arguments in favor of transparency to be "compelling" and overturned the initial decision made by HMRC.
The R&D tax relief scheme, introduced by the Blair government in 2000, aims to boost innovation in small and medium enterprises (SMEs) by offering tax incentives for projects that aim to advance in a field of science or technology by resolving scientific or technological uncertainty.
However, concerns have been raised about the potential use of AI in blocking businesses' access to the tax relief. Elsbury stated that the public should know if AI is concluding or forming decisions in tax enquiries on enterprise tax credits, expressing particular concern about the potential involvement of innovative defensive or offensive weapons systems developed within the UK on behalf of the Ministry of Defence.
HMRC initially refused to disclose AI involvement citing risks of aiding fraudulent claims. The UK Information Commissioner’s Office (ICO) upheld HMRC’s refusal, but later chose not to appeal the tribunal’s decision overturning that stance.
The tribunal emphasized that lack of disclosure erodes taxpayer trust in HMRC processes and that transparency is in the public interest. HMRC has admitted use of AI in monitoring for tax evasion elsewhere, illustrating a broader integration of AI in its operations and the need for transparency and oversight.
While explicit penalties relating directly to AI decisions are not mentioned, increased scrutiny and compliance checks are applied in the R&D tax credit arena due to past misuse and errors in claims. HMRC has until 18th September to comply with the FOI request and face potential scrutiny for non-compliance.
In May, 33 inquiries were made into claims made by professional football clubs, highlighting the need for transparency and accountability in the R&D tax credit scheme across various industries, including those related to defense and the military. HMRC is currently reviewing the court decision and considering their next steps.
Businesses and the public are eager to know if HMRC uses artificial-intelligence (AI) in its decisions regarding research and development (R&D) tax credits, following concerns about the potential impact on small and medium enterprises (SMEs). The ruling at a first-tier tribunal, which overturned HMRC's initial refusal to disclose AI usage, highlights the importance of transparency in technology-driven decision-making processes, especially in connection with finance and government operations.
