UK Tribunal Orders HMRC to Disclose AI Use in R&D Tax Rejections

A UK first-tier tribunal has ruled that HM Revenue & Customs (HMRC) must disclose whether artificial intelligence (AI) was used in the decision-making process for rejecting research and development (R&D) tax credit claims [1]. The order follows a Freedom of Information (FOI) request submitted by tax adviser Tom Elsbury in December 2023. Elsbury and others had noticed patterns in HMRC’s rejection letters that led them to suspect AI was involved in processing R&D tax credit applications [1]. HMRC initially denied the request, citing concerns that such disclosure could aid fraudulent activity, but the Information Commissioner’s Office (ICO) supported this stance last year [1]. The tribunal, however, overturned both decisions, emphasizing that the public interest favors transparency in this matter [1].

Judge Alexandra Marks described Elsbury’s arguments as “compelling” and emphasized that the public has a right to know whether AI is being used in tax decision-making. The ruling also highlighted that HMRC’s refusal to confirm or deny the use of AI in R&D claim assessments could undermine taxpayer trust and confidence [1]. Elsbury, who founded the R&D tax relief software platform Novel, stressed the importance of understanding the safeguards in place and whether penalties might be issued in cases where AI has influenced decisions [1].

Elsbury also raised concerns about the potential use of public large language models—such as ChatGPT—by HMRC officers in assessing R&D claims. He warned that commercially sensitive information could be exposed if such tools were used, particularly in sectors involving national defense. R&D tax relief claims may include details about innovative weapons systems developed for the UK Ministry of Defense, and the exposure of such data through AI platforms could have serious consequences [1].

R&D tax credits have faced increased scrutiny by HMRC in recent years due to high levels of fraud and error. While the agency has taken steps to combat abuse of the system, some professional bodies and tax advisers have criticized its approach as overly aggressive, resulting in the rejection of legitimate claims and discouraging businesses from applying [1]. HMRC has stated it is “carefully reviewing” the tribunal’s decision and “considering our next steps.” The ICO also confirmed it will not appeal the ruling [1].

The tribunal has given HMRC until September 18 to comply with the disclosure order [1].

Source: [1] UK tribunal orders HMRC to reveal AI role in R&D tax credit rejections (https://coinmarketcap.com/community/articles/689615959a14c16682dc5496/)