Artificial intelligence and tax disputes: top five risks for trustees using AI

In the fifth article in our series exploring our experience in UK tax disputes, we examine the growing use of artificial intelligence in tax matters and the key risks this creates for trustees. We highlight common pitfalls and set out practical steps to help manage exposure when using AI tools.

AI is already being used by trustees and their advisers in tax compliance and dispute work, and in some cases for tax planning. This includes summarising HMRC correspondence, organising documents, producing draft returns or responses, and answering tax questions.

It can save time, but it also creates risks. Issues often only emerge later, for example during an HMRC enquiry or when decisions are reviewed by beneficiaries.

The main areas of risk for trustees are set out below.

Top five AI risks for trustees in tax disputes and enquiries

1. Loss of privilege
   

   Putting advice, correspondence or detailed facts into an AI tool may amount to sharing that material with a third party. This risks losing legal professional privilege, particularly if the AI tool's terms and conditions are such that confidentiality over the document has in legal terms been lost. Once privilege is lost, it is permanently lost and impossible to recover. This can result in unhelpful documents becoming disclosable as part of a tax dispute, even if that dispute only arises many years later.

2. Poor decision-making based on AI outputs

   AI can give answers that appear clear and convincing but do not reflect the full facts or the correct tax position.

   If trustees rely on this when planning or reporting tax, decisions may be taken on the wrong basis. This can lead to flawed or ineffective tax planning, missed reliefs, unexpected tax charges, or incorrect filings.

   The result may be a worse outcome for the trust. It may also be harder to show that the trustee properly understood the position and exercised independent judgement.

3. HMRC penalties (failure to take reasonable care)
   

   HMRC looks at whether the trustee took reasonable care. It will not accept reliance on AI as an excuse.
   

   Using AI without checking the output is likely to be treated as careless behaviour. This can lead to penalties as well as tax and interest. Trustees should be able to show that outputs were reviewed and sense-checked.

4. Problematic correspondence on the record
   

   AI is often used to draft communications with HMRC, including making tax arguments. If those drafts are inaccurate or inconsistent, that can create problems later.

5. Challenge from settlors and beneficiaries

If matters are handled poorly, trustees may face challenges from settlors or beneficiaries, particularly in the context of tax enquiries.

Risks include:

• Sharing information with beneficiaries that is inaccurate, incomplete or taken out of context due to reliance on AI-generated summaries.
• Disclosing more information than is required, for example during an enquiry, or in a way that is inconsistent with the terms of the trust or the settlor’s wishes.
• Failing to control how information is presented or circulated, particularly where AI is used to generate or summarise material.

AI makes it easier to produce and share information quickly, but this increases the risk of disclosure that is not properly considered or controlled.

If issues arise, beneficiaries may argue that the trustees failed to manage the flow of information properly or acted on a flawed understanding of the position. The focus will be on whether the trustees exercised proper judgement and complied with their obligations. A trustee who has relied wholly on AI tools without proper checking or application of independent judgement is unlikely to be able to show that they have carried out their duties properly.

Practical points

• Treat AI output as a starting point, not a conclusion.
• Avoid putting privileged or sensitive material into open AI tools.
• Check anything that will be sent to HMRC or shared with beneficiaries.
• Do not rely on AI alone for material tax points – take professional advice.
• Be cautious about using AI to draft correspondence.
• Keep a clear record of the checks carried out.

Conclusion

AI can be a helpful tool in tax matters, particularly where there is a large amount of information. However, it does not reduce the level of care expected of trustees, and issues may only emerge later when matters are reviewed or challenged.

If you have any questions on how to use AI in your trust or ensure protections are put in place to manage the risks, please contact Claire Randall or Alicia Tan who can provide advice and guidance.

About this series

This briefing forms part of a series on UK tax disputes, drawing on our experience advising individuals, trustees and family offices on HMRC enquiries, investigations and related litigation. The series explores how HMRC’s approach is evolving, where the key risks now lie, and the practical steps that can be taken to manage exposure and protect reputation.

The series includes:

• UK tax disputes: managing tax risk – examining the drivers behind increased HMRC scrutiny and common triggers for enquiries.
• Tax and reputation management: why sound tax affairs are a strategic imperative – considering the growing intersection between tax compliance and reputational risk.
• Trustees and UK tax disputes: navigating increased HMRC scrutiny – focusing on the particular challenges facing trustees and offshore structures.
• Legal privilege in UK tax disputes: why it matters – outlining the core principles of legal privilege and how they apply in HMRC enquiries and disputes.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2026