Tax

The dangers of relying on AI to meet tax obligations

Relying on AI to do something that it hasn’t been designed for, something for which there is no substitute for lateral thinking and knowledge, can have significant consequences. Rob Chedzoy, Tax Partner at Milsted Langdon discusses.

Artificial intelligence (AI) has been making waves across a range of sectors since its inception, with the range of potential applications not lost on adopters. 

In the UK, the legal, IT and finance sectors are leading the charge when it comes to using or planning to use AI.  

While this may sound self-sabotaging, it’s far from it. Within each sector, professionals understand where AI can be used as a tool rather than a replacement for their own skills. We also understand, through training and experimentation, what it cannot do.  

There are dangers of over-reliance on AI in a financial and legal context, for all to see.

Rob Chedzoy, Tax Partner, Milsted Langdon

The limited capacity of artificial intelligence

AI has a number of identified and widely accepted benefits, with its capability to spot patterns, analyse data and make simple decisions.

Despite this, industry experts in professional services, including law and accounting, have known for a long time that AI in its current form cannot replace genuine expertise.  

Looking at a recent First Tier Tribunal case, in which Felicity Harber constructed a defence against unpaid Capital Gains Tax (CGT) using precedents from fictitious cases, the limits of AI in tax and accounting are easily exposed.  

Ms Harber disputed a ‘failure to notify’ penalty from HM Revenue & Customs (HMRC) for an unpaid bill of £3,265.11 on a property sale.  

Forming the core of Ms Harber’s case were the outcomes of nine previous tax rulings, demonstrating a precedent for a reasonable excuse for failing to notify HMRC about undeclared capital gains.  

However, the case took an unexpected turn when it was proven that none of the cases really existed – they had been fabricated by an AI system, unbeknownst to Ms Harber.  

What this case reveals is that working with AI is a relationship as well as tool, one in which its operators lead with their expertise and thoroughly review everything that an AI system produces.  

What counts is the ability to provide effective inputs and make sense of the output, rather than trust entirely in AI’s capabilities.  

In this instance, a simple record check by a tax or legal professional could have shown that the rulings were not genuine.

The role of AI in tax

This brings us to the question – what role does AI have to play in tax and accounting? 

Some would say it doesn’t have one, but such blanket dismissals can be avoided if we approach the use of AI in the right way.  

The way that AI systems, such as ChatGPT, find information and learn – using large language model (LLM) – means that they are highly suited to repetitive tasks and automation of organisational tasks.  

They are, in fact, not much more than advanced forms of “predictive text” that use machine logic to come up with the most likely outcome, based on the data they hold.  

However, this means that these systems may fall victim to outdated or completely fabricated information when asked to handle complex requests that rely upon very specific facts or events.   

This is particularly true when used by someone who is not a financial professional and, therefore, lacks the in-depth knowledge needed to review the information provided by an AI system and identify errors.  

For this reason, the role of AI in tax and financial compliance should, for the time being at least, be restricted to administrative tasks and laying the groundwork, including collating data and supporting cloud accounting systems.  

Some may say that is has no role at all, but failing to adapt to the world that AI is creating carries with it an equal amount of risk – especially where competitors are able to leverage its strengths to make their own service better or more efficient.

Prioritising expertise

The key takeaway from this case and from the wider rise of AI in the accounting sector is that expertise cannot be replaced.  

For businesses and individuals managing their finances and calculating their tax liabilities, it’s vital to consult the experts.  

We can identify ways of becoming tax-efficient without breaching regulations and support you with a thorough understanding of compliance.  

While AI certainly has a place within the accountancy sector, it is (at least at present) a tool for the experts to reduce the need for repetitive legwork, rather than being any substitute for training, a personable service or some of the lateral thinking built up over a career in advising on related issues.  

At Milsted Langdon, we are still firm believers in the value of a strong personal relationship and ,wherever possible, in face-to-face meetings.

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