AI in HMRC

Tribunal uncovers hidden tech in R&D claim rejections

In a landmark ruling, Thomas Elsbury v The Information Commissioner ([2025] UKFTT 915 (GRC)), the First-tier Tribunal revealed that HMRC had been using artificial intelligence (AI) to assess and reject R&D tax relief claims — without public disclosure.

The case began when tax expert Thomas Elsbury submitted a Freedom of Information (FOI) request after spotting anomalies in HMRC’s correspondence: Americanised spellings, unusual formatting, and generic responses that didn’t reflect the specifics of individual claims.

Suspecting AI involvement, Elsbury sought transparency. HMRC refused to confirm or deny AI use, citing FOI exemptions aimed at preventing tax fraud. The Information Commissioner upheld this stance. However, the Tribunal disagreed, ruling that the public interest in transparency outweighed HMRC’s concerns. Judge Alexandra Marks found Elsbury’s arguments “compelling,” noting that secrecy around AI undermines taxpayer trust and could deter legitimate claims.

The Tribunal ordered HMRC to disclose whether AI was used, marking a pivotal moment for accountability in tax administration. This decision sends a clear message: when AI influences public policy, especially in sensitive areas like R&D incentives, transparency isn’t optional — it’s essential.

Can AI be used effectively in the Tax Advisory industry?

There’s no doubt that AI is a powerful tool and can be very effectively utilised in the tax advisory industry - the three paragraphs above (including the title) were entirely AI generated and produced in less than 20 seconds.

However, despite what many reports would have us believe, we remain a long way from AI replacing qualified and experienced tax advisers. As with all technology, the results produced by AI are only ever as good as the data put in, or the parameters set. As demonstrated by the HMRC officer in the Elsbury case mentioned above, or the case involving a barrister who it was recently discovered used ChatGPT-like software to conduct his legal research for a tribunal hearing in which he then cited authorities based on cases that were entirely fictitious, AI makes mistakes, suffers ‘hallucinations’ or is at least subject to user error. The output needs to be properly scrutinised by someone who knows what the answer should be, not simply accepted as fact.

AI can be used to give the answer that you (or HMRC) are looking for

AI output is completely dependent on the questions the software is asked. By way of an example, I recently tasked Copilot with producing two reports; the first explaining why certain assets qualified for a specific capital allowances treatment and the second explaining why the same assets did not qualify for the same capital allowances treatment. Both reports were impressively written, drawing from and quoting HMRC manuals, legislation and case law. Both were equally compelling and both were diametrically opposed. Clearly, only one of the reports was correct. There is a right and a wrong answer here.

Which brings us back to the Elsbury case. To me, the important question is not “are HMRC using AI to reach decisions in R&D claims?” but rather “What are HMRC asking AI to produce in these cases?”. If the question is “based on the facts of this case and the relevant legislation, is there a valid R&D claim?” then providing the output is reviewed by an R&D specialist, this is arguably a legitimate use of the technology. However, if the instruction is “write a letter to deny this R&D claim” the use of AI to seek to reverse engineer a required conclusion is altogether more sinister.

Seek advice when matters are complex

HMRC are using AI to produce correspondence offering opinion and interpretation on tax law and it is likely they will continue to do so, not just in R&D claims but in other areas as well. The position they take, which as discussed above, is based on flawed technology, could be wildly inaccurate. Simply accepting HMRC’s conclusions because they are contained in impressively worded correspondence could lead to a large bill for tax that should not be due.

The lesson is clear, wherever an opinion is needed on complex tax issues, you should engage a suitably qualified and experienced specialist to review the issue and give their opinion based on the facts of the case. If you require advice, please contact Ian Shirley or your usual Crowe contact.