Q&A: Assessing by computer

In Marano v CRC [2024] EWCA Civ 876 the Court of Appeal was called upon to rule on the scope of Finance Act 2020, s 103.

The section was introduced, in the words of the technical note issued by HMRC when the intention to legislate was announced, ‘to make clear that HMRC’s use of large-scale automated processes to serve certain statutory notices and to carry out certain functions is and always has been fully supported by legislation’. The legislation is of retrospective effect (although it does not overturn court or tribunal decisions which became final before its introduction on 11 March 2020).

The change of law was considered necessary because, in a number of cases, taxpayers had successfully challenged the validity of assessments levying tax or charging penalties on the grounds that HMRC had not demonstrated the involvement of a human being in actions which the law required to be undertaken by ‘an officer of HMRC’.

Since as long ago as 1970, Taxes Management Act 1970, s 113(1B) has permitted the process of actually making an assessment to be entrusted to administrative machinery including computers; but it preserved the requirement that a real live officer should have made the initial decision that an assessment should be made.

What had the Upper Tribunal decided?

Marano concerned appeals against penalties for non-compliance with a notice requiring a tax return to be filed. The Upper Tribunal had held that HMRC had not proved that an officer had been involved in the issuing of the notice to file, nor in the making of the penalty assessment, both of which had been done through automated procedures.

Absent s 103, therefore, Mr Marano’s appeal (against penalties of nearly £600,000) would have succeeded. The question was whether s 103 validated the automated issue of the notice and penalty assessment. The Upper Tribunal had held that it did: the Court of Appeal has now agreed.

Does s 103 mandate the use of artificial intelligence (AI)?

Section 103(1) provides that ‘anything capable of being done by an officer of [HMRC] by virtue of a function conferred by or under an enactment relating to taxation may be done by HMRC (whether by use of a computer or otherwise)’ and s 103(2) gives a (non-exclusive) list of the actions covered. Section 103(3) provides that ‘anything done by HMRC in accordance with subsection (1) has the same effect as it would have if done by an officer of [HMRC]…’

The Court of Appeal was careful to make it clear that the narrow question before it was whether ‘in a situation in which a statutory function must be carried out by an officer of HMRC, the enactment of FA 2020, s 103 removed the need for HMRC to prove the involvement of an officer in the process.’

The appeal was ‘not concerned with whether s 103 would allow for a fully automated process in which there is no human involvement’. Thus, the court explicitly stated that: ‘Section 103 is not intended to authorise the use of artificial intelligence.’

What was the taxpayer’s argument?

It was argued on behalf of Mr Marano that the purpose and effect of s 103 was limited to authorising the use of computers for administrative tasks in circumstances other than those spelt out in s 113(1B); it remained the case that if the law required that functions be carried out by an officer of a relevant kind it was for HMRC to prove input from such an officer.

The court agreed with HMRC that the words of s 103 were of much wider import, with nothing to suggest that the section ‘is intended to have a restricted meaning or to apply in limited circumstances’. It made a distinction between ‘officers’ (in s 103(1)) and ‘HMRC’ (in s 103(3)) leaving ‘no room’ for the argument that ‘where certain functions must be carried out by an officer of a particular kind, it is still necessary to prove the involvement of such an officer. Such an interpretation ‘is contrary to the plain words of sub-section (3) when read alone and in the context of s 103 as a whole’.

The court thought that the point was made even more clearly by the transitional provisions to the effect that if, before 11 March 2020, a taxpayer had been successful in showing a particular act was invalid as not proven to have been done by an officer, that judgment would not be reversed by s 103. Plainly such a saving would not be needed if proof of the involvement were still required even after enactment of s 103.

Where do we now stand?

The case demonstrates that s 103 has achieved what it set out to do: any power conferred by the law on an officer of HMRC or a particular type of officer of HMRC may be exercised with equal validity by HMRC as a body, with or without use of computers. Proof of the involvement of a flesh-and-blood officer is definitively no longer required. But decision-making by artificial intelligence, if it ever comes, will require further amendment of the law.

This article was originally published by Taxation magazine (issue 4950) and is available here on the Taxation website.