How HMRC Uses AI and Data in Compliance Checks

Q: What does this look like in practice?

Illustration only. Priya is employed and also lets a flat through an agent. She left the rent off her return. HMRC's data shows letting agency receipts in her name that do not appear on the return, and she receives a letter asking her to check her figures. She finds £4,000 of untaxed rental profit and, say, £800 of extra tax. If HMRC treats the error as careless and the disclosure as prompted, the penalty range is 15% to 30% of the extra tax, so £120 to £240, before any interest. If she had spotted and corrected the error herself before any contact from HMRC, the range would have started at 0%. The figures are invented. The pattern is not: data HMRC holds about a third party payment is matched against a return, a letter follows, and the size of any penalty turns on the taxpayer's behaviour and how quickly they tell HMRC.

HMRC says publicly that it uses data analytics and artificial intelligence to find risks, pick cases and prompt people to correct their returns. It also says that where AI could affect the outcome for a taxpayer, the result must be explainable, open to human involvement and open to challenge. In practice, a gap between your return and the data HMRC already holds is more likely to be spotted, and the first you hear of it may be a letter rather than a formal check.

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What has HMRC said about using AI in compliance work?

The clearest statement is HMRC’s Transformation Roadmap, published on 21 July 2025. In the section on closing the tax gap, HMRC says it is using AI to identify issues with the tax system and building new risk targeting capabilities to identify cases for investigation and improve case selection. It also says it will give caseworkers enhanced systems powered by AI, and that it has funding to recruit and train an additional 5,500 compliance staff over the next five years.

HMRC’s privacy notice adds detail. It says HMRC uses AI and machine learning to learn more about large amounts of data and to prevent and respond to customer error and non compliance. Where AI could affect customer outcomes, HMRC says it makes sure the results are explainable, that there is an option for human involvement and that the results are contestable.

How does the Connect system fit in?

Connect is the risk system HMRC has used for many years, and our guide to the HMRC Connect data system covers how it pulls information together. The point for this page is how HMRC describes it officially. An Accounting Officer assessment published on 1 June 2021 says HMRC’s Customer Compliance Group uses a system called Connect to identify potential risks of non compliance, including risks on VAT and Self Assessment repayments, and that many of its components were developed over 10 years ago.

The same document says the Protect Connect programme will replace the VAT and Self Assessment parts of Connect, using SAS detection and investigation tools. It gives the scale: around 5.5 million repayment claims in 2019 to 2020, worth over £80 billion.

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Does a computer decide whether I am investigated?

HMRC’s published material points to tools that flag risks for officers rather than tools that decide. The algorithmic transparency record for the VAT Return Analysis Tool, first published on 16 December 2025, says the tool presents VAT data to an officer and identifies unusual values in a trader’s return history. It states that no decisions are made by the tool and that its outputs support officers in making decisions during compliance checks. The record describes a classical statistical method for finding outliers, using up to seven years of data.

Some processes are automated. HMRC’s privacy notice says it uses automated processing in some circumstances to generate penalties and changes to notices of coding. Where that happens, HMRC says you will be told in writing with the reasons, and you have 30 days to ask for a reconsideration.

Where does HMRC get the data it analyses?

HMRC’s privacy notice lists third party sources including employers, other government departments, credit reference agencies, banks and other financial institutions, digital platforms, overseas tax authorities, and landlords and letting agencies. The Transformation Roadmap says HMRC increasingly uses third party data received under international exchange of information to identify risks among wealthy taxpayers, and plans to make more use of data from sources such as banks to fill in parts of tax returns in advance. Our page on HMRC bulk data gathering powers explains the legal basis for much of this collection.

What are nudge letters and are they compliance checks?

The Roadmap says HMRC is delivering targeted nudges to help people avoid errors in Self Assessment, is piloting the use of its own and third party data to send data driven nudges, and is developing real time risking that feeds prompts while a return is being completed. Our guide to HMRC nudge letters covers the common letter types.

HMRC’s internal manual calls this a one to many approach: a single, common approach to more than one customer. The manual says that if such a letter asks people to provide information or records to show their affairs are correct, HMRC must either open a compliance check under its normal guidance or make clear that providing the information is voluntary. It also tells staff to design these letters in plain language and to set out what HMRC wants the reader to do.

How far back can HMRC look once it finds something?

Better data does not change the time limits. The table below sets out the main limits for Self Assessment and the penalty ranges for careless errors. Our page on the enquiry window for tax returns explains the first row in more detail.

Item	What HMRC or the law says
Enquiry window for a return filed on time	12 months after the date HMRC received the return
Discovery assessment, no careless or deliberate behaviour	4 years after the end of the tax year
Discovery assessment, careless loss of tax	6 years after the end of the tax year
Discovery assessment, deliberate loss of tax	20 years after the end of the tax year
Careless error penalty, unprompted disclosure	0% to 30% of the extra tax
Careless error penalty, prompted disclosure	15% to 30% of the extra tax
Automated decision reconsideration	30 days to ask

What does this look like in practice?

Illustration only. Priya is employed and also lets a flat through an agent. She left the rent off her return. HMRC’s data shows letting agency receipts in her name that do not appear on the return, and she receives a letter asking her to check her figures. She finds £4,000 of untaxed rental profit and, say, £800 of extra tax. If HMRC treats the error as careless and the disclosure as prompted, the penalty range is 15% to 30% of the extra tax, so £120 to £240, before any interest. If she had spotted and corrected the error herself before any contact from HMRC, the range would have started at 0%.

The figures are invented. The pattern is not: data HMRC holds about a third party payment is matched against a return, a letter follows, and the size of any penalty turns on the taxpayer’s behaviour and how quickly they tell HMRC.

What should taxpayers do differently?

HMRC’s penalty factsheet says everyone has a responsibility to take reasonable care over their tax affairs, and that you should tell HMRC about an inaccuracy as soon as you know about it. Given how much data HMRC now holds, the practical steps are:

check your return against the sources HMRC is likely to see, such as bank interest, letting agents, platforms and overseas accounts;
keep the records behind each figure so you can answer a letter quickly;
reply to a nudge letter rather than ignoring it, even if you think the return is right;
if you find an error, correct it before HMRC contacts you where you can.

If you use AI tools yourself, the same responsibility applies. Our guide to using ChatGPT for your tax return covers that, and our page on what careless means explains how HMRC judges behaviour.

Frequently asked questions

Can I ask for a person to review a decision made using AI?

HMRC’s privacy notice says that if AI is used to make an automated decision about you, you will be given information about it, including how to request a human review. For automated decisions generally, it says you have 30 days to ask for a reconsideration.

Is a nudge letter the start of an investigation?

Not necessarily. HMRC’s manual says a letter asking for information must either be part of an opened compliance check or make clear that replying is voluntary. Read the letter carefully, and see our guide to compliance check factsheets for what a formal check looks like.

Does HMRC use chatbots internally?

The Roadmap says HMRC is building internal generative AI chat assistants and agents to give staff better access to information, and automated real time call summaries for telephone advisers.

Will HMRC fill in my return for me?

HMRC says it plans to fill in more of the return in advance using third party data such as bank information. You remain responsible for checking that the figures are right before you submit.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 6 November 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.