HMRC and AI is already changing tax compliance

If you made a mistake on your tax return ten years ago, there was always a chance it would never be spotted.

That wasn’t necessarily because HMRC lacked the information. More often than not, it simply didn’t have the time, technology or resources to compare everything it already held.

A property sale here, dividend income there, or company accounts filed separately from a personal tax return. Unless something obvious caught an inspector’s attention, many assumed those pieces of the puzzle would remain exactly that, separate pieces.

Today, that assumption is becoming increasingly risky.

HMRC recently revealed that its use of digital analytics and artificial intelligence (AI) helped recover or protect around £10 billion in tax during the last financial year. At the same time, the tax authority continues to target the UK’s estimated £59.2 billion tax gap – the difference between the amount of tax that should have been collected and what actually reached the Treasury.

Those figures are significant for one simple reason. They demonstrate that HMRC’s investment in technology is no longer a future ambition or an experimental project. It is delivering measurable results today.

The proof, as the saying goes, really is in the pudding. The conversation has moved on. The question is no longer whether HMRC can use AI effectively; it’s how much more effective it will become.

This doesn’t mean AI is replacing tax inspectors or that every taxpayer is suddenly under suspicion. Far from it. However, it does represent a significant shift in how HMRC identifies potential errors, inconsistencies and non-compliance. For businesses, company directors, landlords and individuals alike, understanding this change has never been more important.

From legacy systems to leading analytics

It might seem surprising that HMRC is now being talked about as a leader in data analytics.

After all, it wasn’t that long ago that the department was making headlines for ageing computer systems, lengthy telephone queues and delays in processing correspondence. We’ve previously written about HMRC’s legacy IT infrastructure and the challenges it created for both taxpayers and advisers.

Those systems haven’t disappeared overnight. However, while many taxpayers still experience frustration with HMRC’s customer service, something very different has been happening behind the scenes.

Rather than replacing every legacy system at once, HMRC has invested heavily in sophisticated analytical technology designed specifically to support compliance work. The result is an organisation that may still face operational challenges but has become significantly more capable of analysing data and identifying potential tax risks.

The irony is difficult to ignore. While taxpayers may still spend time waiting to speak to someone on the telephone, HMRC’s computers are becoming increasingly effective at spotting inconsistencies in the information they already hold.

Slow customer service and sophisticated analytics aren’t contradictory. They simply reflect two very different parts of the same organisation.

AI isn’t replacing tax inspectors

Artificial intelligence often attracts dramatic headlines, creating the impression that computers are making decisions about taxpayers without any human involvement. That isn’t what’s happening.

Instead, AI is best thought of as an exceptionally efficient research assistant. It doesn’t make decisions or accuse taxpayers of wrongdoing; it simply helps experienced investigators identify the cases that deserve a closer look.

Rather than determining whether someone has underpaid tax, these systems analyse vast quantities of information. This allows them to identify unusual patterns and highlight cases that may warrant further investigation. Experienced HMRC officers still make the decisions, but they are now supported by technology capable of reviewing millions of pieces of information far more quickly than any individual could.

One of the best-known examples is HMRC’s Connect system, which has been developed over many years to compare information from a wide range of legitimate sources. According to published figures, Connect supported around 540,000 tax enquiries during the 2024/25 tax year, demonstrating the central role data analysis plays in HMRC’s compliance activity.

AI isn’t looking for guilt; it’s looking for anomalies, and those anomalies help HMRC decide where questions should be asked.

Joining the dots like never before

Most people think about their financial affairs in separate compartments:

• Their accountant prepares the company accounts.
• Their solicitor handles a property purchase.
• Their investment manager issues annual tax certificates.
• Their bank manages their accounts.

Each organisation only sees part of the picture, while increasingly, HMRC can compare much more.

Information from Self Assessment tax returns, Corporation Tax returns, Companies House filings and Land Registry records. This also extends to investment income, overseas reporting agreements, online marketplaces, and, where appropriate, information obtained using HMRC’s legal powers, all of which can contribute to building a broader picture.

Viewed individually, none of this information is remarkable. The real power lies in comparing it.

Imagine a company director receives dividends from their business, sells an investment property and repays a director’s loan in the same tax year. None of those events is unusual individually. But if one source of information doesn’t align with another, modern analytics can identify the discrepancy far more quickly than was possible only a few years ago.

Individually, each piece of information tells a small part of the story. Together, they paint a much broader picture, and that’s exactly where AI excels.

It’s the inconsistencies that trigger questions

One of the biggest misconceptions about HMRC’s use of AI is that everyone is constantly being monitored. The reality is far more reassuring.

Most enquiries don’t begin because HMRC knows something is wrong. They begin because something doesn’t quite look right.

Technology helps identify unusual patterns that may deserve further investigation. These might include discrepancies between company filings and personal tax returns, unexplained director loan balances, undeclared rental income or financial activity that appears inconsistent with other information HMRC already holds.

Importantly, an enquiry does not automatically imply wrongdoing. There are many legitimate reasons why transactions may appear unusual at first glance, and genuine mistakes happen.

However, as HMRC’s analytical capabilities continue to improve, the likelihood of inconsistencies remaining unnoticed is steadily reducing.

Technology is only part of the picture

Artificial intelligence is just one element of HMRC’s wider compliance strategy.

The department is also making greater use of information-sharing agreements, expanding its legal powers to obtain financial information and strengthening incentives for whistleblowers to report serious tax evasion.

Under HMRC’s enhanced reward scheme, eligible informants whose information leads to the recovery of more than £1.5 million can receive between 15% and 30% of the additional tax recovered.

Alongside this, HMRC’s Fraud Investigation Service secured 260 criminal convictions during the 2025/26 tax year, underlining its continued focus on tackling serious tax fraud.

Taken together, these developments paint a clear picture. AI is not replacing traditional compliance activity, but it is making it more targeted, more efficient and increasingly data-driven.

Good records have never been more important

For taxpayers who keep accurate records and seek professional advice, these developments should not be a cause for concern. In many ways, they reinforce principles that have always represented good practice.

Business owners should ensure that director loan accounts are properly maintained, dividend decisions are fully documented, and company records accurately reflect transactions throughout the year. Landlords should retain comprehensive records of rental income and allowable expenses, while individuals should ensure tax returns are prepared using complete and accurate information.

A sensible compliance health check

As HMRC’s analytical capabilities continue to evolve, it’s worth asking yourself a few simple questions:

• Are your company records accurate and up to date?
• Do director loan accounts reconcile correctly?
• Are dividend payments properly documented?
• Have all property income sources been declared?
• Could significant transactions be easily explained if HMRC asked questions?

If the answer to any of these is “I’m not sure”, now is the time to review them – not after an enquiry arrives.

Good bookkeeping has always mattered. Today, it matters even more because technology makes inconsistencies easier to identify. Well-maintained records don’t just help you comply with your obligations; they make responding to any HMRC enquiry significantly quicker and less stressful.

Looking Ahead

Artificial intelligence is transforming almost every industry, and tax administration is no exception. 

For years, many assumed HMRC simply lacked the technology to connect every piece of financial information it already held. Recent evidence suggests that assumption is becoming outdated.

The proof is no longer theoretical. HMRC’s own figures show that investment in AI and digital analytics is delivering tangible results, helping recover billions of pounds in tax while allowing compliance teams to focus their efforts more effectively.

For most taxpayers, this isn’t a reason to panic. It is, however, a timely reminder that accurate records, consistent reporting and proactive tax advice have never been more valuable.

The best tax strategy has never been trying to stay below the radar. It’s making sure there’s nothing for the radar to find.

As HMRC continues to expand its use of AI and data analytics, ensuring your tax affairs are accurate, consistent and well-documented has never been more important. Whether you’re a business owner, company director, landlord or individual taxpayer, the team at Wilkins Southworth can help you review your tax affairs and ensure they’re prepared for an increasingly data-driven compliance environment. 

If you’d like to discuss your circumstances, we’d be delighted to help.