HMRC is set to receive sweeping new tax powers to seize cash from bereaved families, scour the AI chatbot history of taxpayers and slap huge fines on those who made inadvertent errors in documents, under changes quietly pushed through after the Budget.

Following John Healey’s maiden Autumn Budget a raft of new proposals were added the Finance Bill, dubbed ‘Budget Resolutions’, which survived the first reading on 3 November.

While some resolutions centre on tax hikes discussed by Healey at the despatch box, including the hike to savings, property and income tax, others dramatically beef up the powers of the tax authority.

The shake-up to the system comes as HMRC aims to close the UK’s staggering tax gap.

According to the latest estimates from the government body, the shortfall cost the Treasury nearly £60bn in lost tax receipts during the 2024/25 financial year.

Healey has pledged to close the gap, but as Labour’s manifesto prevents hikes to income tax, VAT and employee national insurance, the government is leaning on compliance and greater enforcement powers for HMRC to raise revenue.

Healey said restoring fiscal discipline was his “first commitment as Chancellor”, including “raising revenue from those who can afford to pay”.

Punishing tax mistakes

HMRC will introduce a statutory ‘Duty to Correct’ regime from April 2028, which will legally require taxpayers to rectify mistakes on old tax returns upon becoming aware of them.

Currently, a mistake discovered after filing is treated by the authority as “careless” which carries a lower penalty of up to 30 per cent of the unpaid tax over six years. But the new regime will see an inaccuracy – even if unintentional – branded as “deliberate”, the term used by HMRC when it believes it is intentionally fed false figures or withheld information in order to pay less tax.

It is the highest penalty tier for the authority, carrying a fine which can be up to 100 per cent and a scrutiny period of 20 years.

The changes have raised concerns among tax barristers, who have called out the lack of minimum threshold on tax errors as well as the two-decade long window, as it clashes with statutory record-keeping rules for the self-employed.

They are only legally required to keep records for up to five to six years, meaning those facing a 20 year audit may be unable to produce needed receipts and bank statements.

Fiona Fernie, partner at Blick Rothenberg, said: “This legislation needs clearer safeguards and a finite time limit for making corrections. Otherwise, a measure intended to modernise compliance could undermine it.”

An HMRC spokesperson said: “We know most of our customers act in good faith and want to get their tax right. These changes make it quicker and easier for taxpayers to correct errors when we flag them.

“They won’t be penalised for innocent mistakes, and deliberate penalty charges only arise where taxpayers fail to take reasonable steps to correct an inaccuracy they were already aware of.”

Bereaved families hounded for longer

HMRC can currently demand information from the families of deceased taxpayers for up to four years after their death if they suspect they’ve paid the wrong amount of tax. This covers inheritance tax, capital gains tax and income tax.

Under Labour’s proposals, HMRC will be granted the right to demand information about the dead for an unlimited period, and the right to gather evidence for existing tax investigations that reach back up to 20 years.

This could see families by the government years after an estate has been settled, which advisers have warned could lead to disputes among relatives or leave them buckled by tax bills they cannot afford to pay.

Draft legislation states HMRC will have to apply to a tax tribunal to send an information demand more than four years after death, but it will not be required to inform the executors of the estate, or the family, until after the tribunal has made a decision.

A government spokesperson said: “This does not mean new powers and will not affect the vast majority of taxpayers.

“The updates to HMRC’s existing information powers reflect how tax information is stored and processed digitally, and updates powers in line with the international standards of the Organisation for Economic Co-operation and Development.”

AI chatbot histories set to be snooped on

The tax authority will soon be able to view taxpayers’ messaging records with AI chatbots under new powers that will allow HMRC to probe digital records.

HMRC 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, the definition of digital information will be expanded to allow access to “relevant” digital records, which may include AI chatbots.

The move will also require third parties, including software providers, to give HMRC people’s tax information if they hold it.

“Conversations between a taxpayer and their advisor are confidential and AI conversations should be treated in the same way, so without the right checks and balances HMRC’s new powers could cross the line between a legitimate investigation and overreach,” Praveen Gupta, head of tax at accountancy and advisory firm Azets, said.

Gupta added it “cannot be one sided” and “robust safeguards around these powers will be critical”. Doing so would allow people to “understand why they’re being investigated and that the information being requested is relevant and a reasonable request for HMRC to understand their tax affairs”. 

“Will individuals be able to request and be granted access to HMRC’s own internal notes and AI research into their tax affairs? In the interests of fairness, they should be,” he said. 

Matthew Greene, partner at Stewarts, said while HMRC accessing AI chat histories “could help uncover tax irregularities”, it “also risks dragging innocent taxpayers into unnecessary investigations.”

“People may use AI to explore hypothetical tax arrangements without ever acting on them,” Greene said. “Human judgement is essential for distinguishing between honest mistakes and deliberate tax evasion, rather than treating AI conversations as proof of wrongdoing without considering the wider facts.”

“HMRC must stay within the law as requesting entire chat histories could expose sensitive personal or commercial details that have no bearing on someone’s tax affairs, opening the door to litigation over whether HMRC has exceeded its powers,” Greene added.

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.”

‘Reversal’ of electronic signature policy

Alongside the changes in the bill, the tax authority appears to have quietly rolled back on allowing electronic signatures on forms it uses to authorise an accountant, tax adviser, or tax agent, for a taxpayer, understands. 

HMRC has allowed electronic signatures on the so-called 64-8 forms since 2021. However, despite stating in communications regarding the forms that it cannot accept electronic signatures, the tax authority has not released any guidance to advise taxpayers against using electronic signatures. 

“In a reversal of policy, it seems that HMRC is now rejecting electronic or scanned signatures and insisting on originals signed in ink,” Joseph Adunse, a tax Partner at accountancy firm Moore Kingston Smith, said.

Adunse said this “is affecting both self-assessment registration and tax agent authorisation and has been done without warning or explanation.” 

“There are multiple situations, including for clients living abroad, where a routine authorisation or registration can become a paper chase, adding cost and delay. This latest move by HMRC is a step backwards; making compliance harder is no way to make the tax system work better,” Adunse said. 

HMRC were contacted for comment.

Whistleblower income tax

Whistleblowers are also set to see a change to how they receive their payouts from HMRC.

The tax authority operates a ‘Strengthened Reward Scheme’ for individuals who report serious tax avoidance or evasion. 

To be elligible, tip must help HMRC collect at least £1.5m in unpaid tax, excluding interest and penalties, and carries a reward ranging between 15 per cent and 30 per cent of the tax actually collected.

Legislation allows the tax authority to pay financial informants in full, leaving it up to the whistleblower to take the money, declare it on their self-assessment tax returns at the end of the financial year and pay the subsequent income tax bill.

But the Finance Bill outlines HMRC instead being able to deduct 45 per cent income tax at the source before releasing the funds as of March 2027.

Whistleblowers will instead receive 55 per cent of their gross reward upfront, while HMRC immediately retains the remaining 45 per cent to cover the tax liability.

The actual amount of tax a whistleblower owes remains unchanged.