UK tribunal orders HMRC to reveal AI role in R&D tax credit rejections

A judge is pushing the UK’s tax office, HM Revenue & Customs (HMRC), to be transparent about AI use in its decision-making processes. 

The judge ordered HRMC to disclose information about how it decides on research and development (R&D) tax credit applications.

HMRC to disclose whether it used AI in R&D tax credit decisions

HM Revenue & Customs has been ordered to reveal whether it has used artificial intelligence to decide to reject tax credit claims. A first-tier tribunal has ruled that the tax authority must confirm if and when AI was involved in making determinations on research and development (R&D) tax credit applications.

The order came after tax pro Tom Elsbury, who suspected AI had been deployed in the decision-making process, filed a Freedom of Information (FOI) request in December 2023.

Based on the language and structure of HMRC’s rejection letters, Elsbury and several other tax advisers had concluded that AI tools were being used in processing claims. His FOI request sought confirmation from HMRC, but the department refused, arguing that revealing such information could aid individuals attempting to make fraudulent tax relief claims.

The Information Commissioner’s Office (ICO) upheld HMRC’s refusal last year, siding with the department’s position. However, the tribunal this week overturned both HMRC’s and the ICO’s decisions, stating that “the balance of the public interest lies in disclosing the information requested.”

HMRC now has until September 18 to comply with the order.

Tribunal cites public interest and trust

The ruling noted that HMRC’s refusal to confirm or deny the use of AI in R&D claim assessments “reinforces the belief” that such tools may be in use “perhaps in an unauthorised manner — thus undermining taxpayers’ trust and confidence in HMRC’s treatment of claims.”

Judge Alexandra Marks, presiding over the case, described Elsbury’s arguments as “compelling” and found that the public has a right to know whether AI plays a role in tax decision-making. Elsbury represented himself in the proceedings.

The ICO responded to the ruling, stating, “We have received and respect the Tribunal’s decision on this matter. Having reviewed the details, we will not be appealing.”

HMRC said it was “carefully reviewing the decision” and “considering our next steps.”

R&D tax credits have been subject to heightened scrutiny by HMRC in recent years following the discovery of high levels of fraud and error. While HMRC has sought to clamp down on system abuse, several professional bodies and tax advisers have criticized its approach as overly aggressive. They warned that it has led to legitimate claims being rejected and some businesses avoiding applications altogether.

Elsbury, the founder of the R&D tax relief software platform Novel, told news outlets that it was important for taxpayers to know what safeguards were in place and whether penalties had been issued in cases where a generative AI tool had influenced a decision.

Elsbury also raised specific concerns about the potential use of public large language models, such as ChatGPT, by HMRC officers when assessing claims. If such tools were used, he said, there was a risk that commercially sensitive information that is expected to remain confidential could be exposed in the public domain.

These risks could be particularly severe in industries linked to national defense, he warned. R&D tax relief claims can involve details of innovative defensive or offensive weapons systems developed for the UK Ministry of Defense. The disclosure of such information through public AI systems “has the possibility of causing catastrophic consequences,” Elsbury cautioned.

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