HMRC’s powers to probe digital records are set to increase under newly proposed rules, as the tax authority will soon be able to view the chat histories of AI chatbots taxpayers use for tax questions.
The tax authority currently has powers to request and obtain copies of digital “records” if it has a legitimate reason to do so to determine whether a taxpayer has paid the correct amount of tax.
However, under the government’s newly proposed rules in the Finance Bill, expected to receive Royal Assent next March, the definition of digital information will be expanded to allow access to “relevant” digital records.
The move will also require third parties, including software providers, to give HMRC people’s tax information if they hold it.
HMRC can demand access to personal information under a so-called Schedule 36 notice. However, those who fail to respond to information requests could face an initial fine of £300, and taxpayers who do not report inaccuracies may face a fine of up to £3,000.
Matthew Holman, partner at Cripps, told City AM there is a “clear risk” arising from taxpayers using AI to discuss tax issues and the “unpredictability” of AI systems.
“The nature of the technology is fundamentally discursive and conversational; it is not challenging to imagine that a discussion with a sophisticated large language model about an individual’s tax affairs could easily (and unintentionally) contain content later used to allege intention to evade tax,” he said.
He added that an AI model “may suggest certain tax arrangements which could amount to evasion or generate responses with the user which indicate an intention to evade tax, all of which would be useful to an HMRC investigation.”
Holman said that while the Bill does not explicitly reference AI, the revised definition of ‘digital information’ will be “significantly broader” than it is now.
Holman said that while the Finance Bill is not “explicitly enabling access to AI history”, it is instead “expanding its operative definitions in such a way that AI could be within its new (wider) scope.”
“It is being suggested by various commentators that the rationale for broadening the definition is to encompass records created by the use of artificial intelligence by those under investigation,” he added.
Nicola Cain, chief executive and principal consultant at legal consultancy firm Handley Gill, told City AM the changes may raise data protection issues, and while the changes “will provide HMRC with a lawful basis to access additional information about taxpayers under the UK GDPR”. The tax authority will still be expected to follow legal requirements, meaning it must do so only when necessary and in a proportionate manner.
Cain added that taxpayers using AI for tax questions, which might be “better directed to a tax lawyer”, and creating a permanent digital record on a third-party platform which HMRC may be able to access “risks exposing taxpayers and their activities.”
‘Deeply intrusive overreach’ by HMRC
Anne Strickland, researcher at lobby group the Taxpayers’ Alliance, said the government’s plans to expand “sweeping powers” HMRC already has “further risks trampling over the privacy of ordinary Britons.”
“Forcing taxpayers to hand over private AI conversations would be a deeply intrusive overreach by the taxman,” Strickland said.
“Ministers must rein in the tax authority and ensure that this never becomes implemented,” she added.
When contacted for a comment, an HMRC spokesperson said: “This is about updating our existing information powers to reflect how tax information is now stored and processed digitally. It is not about going through everyone’s use of large language models. We can only request information where we already have a lawful basis to do so.”
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