How HMRC plans to use AI to assess the risk of tax evasion by businesses

We’re hearing more and more about artificial intelligence (AI) and how its use can change our way of working both now and in the future. AI is constantly evolving, but it generally involves machines using statistics to:

Find patterns in large amounts of data,
Perform repetitive data tasks without the need for human input, and
Most importantly, ‘learn’ from experience.

It’s not just big business that’s embracing AI. We’ve been informed that HMRC intends to enhance its use of this technology and is already putting procedures in place to take full advantage of it.

Background: HMRC’s use of analytical technology in detecting tax evasion

HMRC has been using advanced analytical technology for at least a decade by pulling together information from various sources to identify potential cases of tax evasion and avoidance.

👉For example, they cross-check property ownership data from the Land Registry, client lists from estate agents, and online property rental ads against tax returns. Using this process, buy-to-let landlords who might be underpaying tax on their rental income (or who’ve never declared the source of income in the first place) can be detected.

Other data sources include social media, flight sales and passenger information, DVLA records and UK Border Agency records – and the list is being added to all the time.

HMRC’s use of data from online sales platforms

As of 1 January 2024, online marketplaces and sales platforms (e.g., eBay) are obliged to provide user data including names, addresses, dates of birth, bank account details and information on sales made through their platforms. Anyone earning more than £1,000 a year must complete a tax return. (We wrote about this in a previous blog post: Selling online – when do you need to tell HMRC?)

How HMRC will use IT and AI in future

A recent consultation (updated in April 2023) looked at options for increasing the amount and type of data HMRC collects from employers. It also considered how additional information on employees’ occupations, work locations and hours worked could be collected through the PAYE Real Time Information (RTI) system.

One new area where HMRC intends to use AI capabilities is when taxpayers submit a tax return. AI will be used to predict ‘triggers’ that lead to customers contacting HMRC with queries. This will allow HMRC to create what they call ‘interventions’ so taxpayers will no longer need to contact HMRC for the answers to the more fundamental questions.

Using AI to assess the risk of tax evasion

The main area of interest to HMRC – and where AI will be best suited to HMRC’s investigation work – is in using AI’s ability to analyse and assess taxpayer behaviour and patterns of behaviour to ensure compliance with tax laws.

Analysis of data analytics will help identify high-risk areas and individuals, building cases for HMRC investigators – a more targeted approach saving resources and time.

AI will also work with other tools such as geo-mapping (the process of taking location-based data including sales numbers, demographic info, etc), using the resulting information to create a map. By pulling together all information collated from the various sources available, AI will learn to spot anomalies, identifying businesses that are potentially under-reporting their income or overstating their expenses, thereby targeting areas for investigation.

👉Practical point: The value of AI to HMRC will not be in the collating of data (which it does already) but in the software’s ability to learn to analyse that data in a way that will enable HMRC to do its job.

Other useful information

👉ICAEW Insights in Focus podcast: How is HMRC digitalising taxation?

👉HMRC IT strategy: 2022 to 2025

📢❕ The information in this blog post was correct at the time of writing. Please check with your accountant for the latest information or, if you don’t have an accountant, join the Financial Resilience Hub to get access to one of ours! Alternatively, keep an eye on HMRC’s website for updates.

ABOUT THE AUTHOR

Helen Monaghan is a Chartered Management Accountant, accredited NLP Practitioner & Finance Coach. Both a psychology graduate and an accountancy graduate, she has authored three business books, which beautifully bring together psychology, finance, and tax to empower the reader about money. Helen is the CEO of HM Finance Coaching & Advisory Ltd, a company that provides financial education and business mindset coaching to small businesses across the UK, in addition to accountancy services for limited companies in Scotland and across the UK. Helen is also the founder of The Financial Resilience Hub – find out how we can support you, and your business, to be financially resilient through our monthly membership.