Osborne Clarke LLP | Jack Prytherch | Yousuf Chughtai
Blobal | OECD | United Kingdom
This article is an extract from Lexology Panoramic: Tax Controversy 2026. Click here for the full guide.
Global economic circumstances and growing political unrest are continuing to see pressure heaped on tax authorities to help increase public revenues. In the UK, this is expressed in terms of closing the ‘tax gap’ (the difference between the amount of tax that the government considers should be collected and the amount of tax actually collected).
As a result of this pressure, tax authorities are being forced to adapt their behaviours. This includes, of course, becoming more aggressive in their approach – and we are seeing this very clearly in the ever rising number of tax investigations but also in the positions being adopted by tax authorities on what may have been previously accepted tax issues. It also includes a need for tax authorities to become more innovative in their roles as collectors of public revenue. At the heart of this innovation lies technology. New tools can help tax authorities become more efficient in their duties, assisting them with identifying errant taxpayers and maximising opportunities for compliance and collection. At the same time, new technologies bring with them a new set of tax risks for tax authorities to tackle.
One of the most significant new challenges facing tax authorities and taxpayers alike is the evolving role of AI. In the UK, for example, HMRC’s flagship AI-driven analytics ‘Connect’ platform has been in operation since 2010 and already aggregates over 55 billion data items. However, in its latest Annual Report and Accounts HMRC has announced that it plans to use technology to go further to target taxpayers. It is expected that an increasing number of tax authorities will also look to implement new methods of using AI to bring greater efficiency to their processes. The Organisation for Economic Co-operation and Development (OECD) recently announced that AI is already being used by more than 70 per cent of tax authorities and highlighted the role of AI in the detection of tax evasion and fraud and in risk assessment processes. Malta was reportedly able to collect €650 million more in tax in 2024 compared to the year before, thanks in part to the use of specific AI tools. In France the government has reportedly deployed AI tools to scan financial records and documents for unusual entries, identify offshore accounts and review transfer pricing structures.
Tax authorities, however, are not alone in seeking to maximise the opportunities offered by AI. At the extreme end, those involved in tax fraud or avoidance may train their own adversarial AI models to stay below the radar of tax authorities (a form of what is known as ‘AI vs AI’). More broadly, there are of course genuine uses for AI by taxpayers, for example to help reduce time and costs in defending tax investigations and litigation. However, there are inevitably limitations and professional advice with a strategic, human element will always be critical – in the UK, for example, there have been reported cases of taxpayers citing AI-discovered legal authorities that bear no relation to their arguments or which are otherwise entirely fictitious!
Technologies like AI will be particularly useful for tax authorities when managing the increasingly vast amount of data at their disposal, including a huge amount of new information being shared through international initiatives. Most authorities already had robust tax information exchange agreements in place along with provisions for cooperation embedded within their double tax treaties but this has been enhanced by growing compliance internationally with the OECD and Council of Europe’s Multilateral Convention on Mutual Administrative Assistance on Tax Matters. As of July 2025, there were 151 jurisdictions party to the convention, with more expected in the future. In addition, an updated framework for joint tax authority audits within the EU was recently introduced as part of DAC7. How large initiatives, like those proposed by the OECD, are implemented and enforced by the most powerful economies however remains subject to global politics. For example, the G7 has recently agreed on a path forward for the global minimum tax and Pillar 2 of the G20/OECD Inclusive Framework project on Base Erosion and Profit Shifting which would enable the US minimum tax system to operate in tandem with the new regime. This agreement has helped to remove the threat of tariffs under section 899 of the ‘One Big Beautiful Bill’ which would have imposed an additional tax burden on the G7 economies.
DAC7 also introduced new rules requiring digital platforms to collect and verify information on third party-sellers on their platforms, and to make related reports to the relevant tax authority. The intention is that the information obtained will be shared between jurisdictions to allow tax authorities to target local non-compliance.
The OECD’s Crypto-Asset Reporting Framework (CARF) creates a similar reporting burden for ‘reporting cryptoasset services providers’ (broadly, entities that provide services effecting exchanges of cryptoassets for or on behalf of customers). These types of measures will make it easier for tax authorities to target potential revenue streams that have not previously been traceable by traditional means, including from so-called ‘side hustles’ and gig workers. If hundreds or even thousands of non-compliant individual taxpayers are discovered through these new information reporting regimes, there is an interesting question as to whether tax authorities may decide it is more efficient to focus on the digital platforms/cryptoasset service providers themselves (as the unwitting facilitators of this tax non-compliance) rather than conducting investigations into the individuals. The EU has also provided detail about DAC8, which will lay down rules and procedures based on CARF for exchanging information for EU member states.
New technology is also creating tax issues in other areas. A good example is the rapid growth of the fintech industry. Given the rising importance and value of this industry, tax incentives are being made available worldwide to fintech companies and investors. However, as the fintech industry has expanded, tax authorities have taken notice and applied increasing scrutiny to R&D tax claims in particular. In the UK, HMRC have recently updated their R&D guidance and opened up a new facility for taxpayers who may have overclaimed R&D relief and wish to make a voluntary disclosure to HMRC. It may be that other jurisdictions take a similar approach as governments seek to strike the fine balance of encouraging innovation and growth whilst at the same time maximising their tax take.
Many governments are also taking stronger measures generally against tax fraud. The UK government recently announced that it was expanding its counter-fraud capability with the aim of increasing the number of charging decisions for the most serious fraud by 20 per cent by 2029-30. Part of this involves tackling fraud ‘facilitated by those in large corporations’. This is a reference to the Criminal Finances Act 2017 (CFA) which introduced corporate criminal offences for failing to prevent the facilitation of tax evasion. In August 2025, a UK accountancy firm became the first business charged under the CFA offences for failing to prevent the facilitation of tax evasion. This landmark prosecution comes just weeks before the new failure to prevent fraud offence set out in the Economic Crime and Corporate Transparency Act 2023 comes into force.
Taxes will continue to be important tools for governments to manipulate behaviours (as illustrated by the recent US tariffs). For example, climate change and the pressing need to find sustainable solutions continues to be a significant issue affecting both taxpayers and tax authorities. The UK government has already implemented a range of levies (plastic packaging tax, climate change levy and aggregates levy) to try and encourage businesses to be more conscious of their environmental impact and generate revenue. The EU has also recently introduced the Carbon Border Adjustment Mechanism which seeks to address the issue of carbon leakage: the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation.
These moves tie in to a wider emphasis being placed by governments on the environmental, social and governance (ESG) agenda, and taxpayers worldwide should be conscious of how their environmental responsibilities might impact their public image, and be aware that there is likely to be greater focus in this area from tax authorities. Tax also continues to become an increasingly important element of the other parts of the ESG agenda, with tax avoidance increasingly viewed as a moral issue – especially for large corporates. In light of the significantly increased transparency highlighted above, businesses will need to take particular care that they are being compliant with the rules of any jurisdictions in which they operate.
Taxpayers across the world will continue to impacted by high interest rates if inflationary pressures do not abate. Where tax disputes become protracted, high interest rates will inevitably raise questions of unfairness where delays can be attributed to the actions of the tax authority. In the UK, while it may be possible to ‘object’ to late payment interest in certain circumstances, taxpayers should expect strong resistance from HMRC and there is no right of appeal. Where a payment on account is not possible to mitigate interest charges, efficient case management in tax controversy has never been more important.
This article first appeared on Lexology | Source
