HM Revenue and Customs (HMRC) is gearing up for significant changes as it introduces heightened scrutiny on tax claims and adapts to new technologies, particularly artificial intelligence (AI). The government’s recent announcements signal clear priorities as the Labour party seeks to implement various funding measures and increase tax enforcement moving forward.
According to experts, companies relying on AI to prepare their Research and Development (R&D) tax claims should proceed with caution. The warning was issued by Blick Rothenberg, with Ele Theochari, a partner and R&D specialist at the firm, emphasizing the dual nature of opportunities and risks brought by the recent AI Opportunities Action Plan. While AI has the potential to streamline the claims process, it cannot replace the human oversight imperative for ensuring the validity of submissions. Theochari cites concerns over the growing use of AI tools by tax claimants, stating, "Many submissions appear wordy but lack substance, making them vulnerable to scrutiny by HMRC."
The rising trend of employing AI-based tools to compile and submit R&D claims is concerning to Theochari, who mentions the downfall of several large, volume-focused R&D companies over inadequate quality and follow-up investigations. She cautions about the phenomenon known as AI hallucinations, where even accurate data fed through AI can result in errors, leading to potential claim rejections. Pointing out HMRC’s challenges with AI, she insists, "The role of a knowledgeable adviser cannot be underestimated. Expertise is necessary to verify the factuality and relevance of AI-generated content before it faces HMRC scrutiny."
Meanwhile, the broadening focus of HMRC, particularly projected for 2025, also points to increased attention on businesses and individuals suspected of underreporting taxes. Tax disputes partner at HaysMac, Danielle Ford, discusses the government’s ambitious spending commitments resulting from the recent Autumn Budget, which has elevated the UK's tax liability by 2.2% of GDP, or £40 billion. This funding drive will likely prompt HMRC to intensify its compliance activities across various sectors, evaluating potential tax collections and addressing perceived loopholes.
Looking at HMRC’s internal restructuring, there are noticeable shifts occurring with the appointment of Treasury minister James Murray as chair of the tax agency’s board. This change has raised questions about HMRC's traditional classification as a non-ministerial department. Dame Meg Hillier, chair of Parliament's Treasury Committee, noted concerns over the political involvement now seen at HMRC, which historically has operated independently from direct ministerial influence. Her concerns highlight the need for clarity within HMRC's operational mandate as Murray reassures MPs about maintaining its autonomy, stating, "My role is focused on leadership to help deliver the government's agenda effectively and at pace."
Murray's active involvement reflects the government's commitment to reforming HMRC's operations to align with its strategic priorities, such as closing the tax gap and enhancing customer service. He underscored the importance of being hands-on with HMRC, expressing the desire to move outside the department's "comfort zone" to achieve more innovative solutions. He stated, "We need to work out how we can make this transition to a digital-first organization, and so on." This digital transformation aligns with his perspective on allowing HMRC to test its limits and improve service delivery.
The Supreme Court's recent ruling on HMRC v PGMOL reinforces the notion of careful consideration surrounding tax compliance relationships. This case revolves around determining whether contracts with match referees classify as employment for tax purposes, shedding light on grey areas within employment tax laws. The judgment examined key principles of mutual obligation and control, delivery, and clarified the distinct elements required for employment classification under tax laws.
Where formerly HMRC's criteria might have faced ambiguity, significant guidance has emerged indicating the various factors affecting compliance. The importance of assessing the practical workings of employment relationships cannot be understated, especially as many external partnerships enter scrutiny against rigid legal interpretations. With Labour’s recent vow to bestow workers day one rights to unfair dismissal, the intersection between employment law and tax compliance remains urgent.
Despite the controversies surrounding AI's role, experts remain optimistic about its applications within R&D claims—should adequate human oversight be preserved. This reflects the balancing act HMRC is currently attempting, as it works to modernize its operations amid the challenges of advancing technology. The interplay between AI, human expertise, and stricter compliance reinforces the idea of proactive governance as HMRC resolves to bolster its tax capture strategies and improve overall taxpayer service.