web development slot pragmatic can be a sought-after skill, which can open the door to many opportunities for earning money. However, being a web developer can be stressful and demanding particularly when you are required to meet deadlines, complex projects, and demanding clients. If you’re trying to diversify your sources of income and decrease your dependence on active income, you might think about pursuing passive income.

Top Passive Income Ideas for Web Developers

Passive income can be a great way for web developers to generate additional revenue streams without constant active effort.

Start a SAAS Product Developer Business

A SaaS solution could be an ideal method for Web developers to earn regular income. It is possible to build a large customer base and earn a steady revenue from membership fees by creating a solution that addresses the same issue that is common to other companies. After your product has been developed and launched, it will continue to earn money without needing an ongoing effort and allow you to focus on other business tasks.

Start an Affiliate Marketing

You can earn money by making use of affiliate marketing to promote the services or products of other individuals. Each time a purchase is made using your affiliate link, you’ll earn a commission. Your expertise can be utilized as a web designer to create content that draws people to your site and promotes the products that you’re associated with. When your content is finished you can then be able to generate passive income.

Also read: Top 15 Unique Website Ideas

Start an Online Jewelry Store

It is possible to sell your items to a huge client base and earn income from passive sources by setting up an online jewelry store. An appealing and user-friendly online store that showcases your items can be built with your skills as a web designer. After your store is set up, it can continue running and earning revenue without requiring an endless amount of work.

Start a Content Writing Company

As a web developer, starting a content writing business could be an excellent option to earn a passive income. It is possible to delegate work and focus on business growth while also earning a share of the profits by hiring additional editors and writers. If your team is on the job the business will continue to earn money with no direct involvement, which gives you the opportunity to move to other tasks.

Start a Subscription Box Business

Customers who subscribe to receive a particular set of products every month from a subscription-box business. Because customers love getting a variety of items from different brands Subscription boxes are in fashion in the present.

Sell Digital Products

Digital assets, such as stock images and 3D models are developed and sold by web developers. Digital assets are easy to use and could generate earnings for many years. The most highly rated items are those that can be made digital. They are easy to create and share and are a great way to increase your business.

Start a Tech Blog

Blogging has become an income-generating venture for those with the appropriate expertise and who are able to effectively communicate with their readers. Through sharing useful information bloggers are able to earn money through a variety of ways, including affiliate marketing sponsorships or Google Ads.

Start A WordPress Template Business

Web developers are able to design templates for their websites and sell them on marketplaces for digital goods like ThemeForest. After a template has been created it can be used to continue earning revenue without any additional effort from the designer.

Also read: Top 30 Money Making Apps for Extra Income

Start A Website Hosting Platform

Web developers are able to offer website hosting services to their customers or offer hosting packages for sale on websites. Hosting could be a lucrative passive income stream because customers regularly pay to host services.

Start an Etsy shop

Etsy is a popular platform for artists to sell their products and web designers are able to profit from this opportunity by creating a visually appealing and user-friendly shop. After you’ve established your shop, you’ll be able to create multiple passive income streams by implementing actions like refining the product listing, using social media to promote the shop, and collaborating with influencers to enhance its visibility.

Final Word

Web developers can generate passive income through digital products, affiliate marketing, ad revenue, mobile apps, online courses, and more. Diversifying income streams can lead to financial stability and growth.

‘The Great Resignation’, an influx of employees leaving their jobs in unprecedented numbers over the last few years.

Since the pandemic, many people have re-evaluated their priorities, seeking better work-life balance, more meaningful roles, flexible working and growth opportunities. This trend shows no sign of slowing and reflects a broader shift in generational expectations in the workplace.

This wave has affected businesses of all sizes, but smaller companies, particularly those in more specialist fields, can feel a much larger impact. Finding and keeping the right people has become one of the biggest challenges for SMEs. Losing talented employees can disrupt growth, affect consistency across the business, and create gaps that are difficult to fill.

What’s the solution?

Nothing ever is a guarantee, but there are some tried and tested ways to give your team a stronger reason to stay and remain motivated.

One of the most effective tools is an EMI (Enterprise Management Incentive) scheme. This is a government-approved share option scheme, which allows businesses to grant selected employees the right to buy shares in the company at a future date at a discount (or even todays price).

By giving employees a stake in the business, it gives them more incentive for contributing to the growth in the company and hopefully staying in the long run. This incentive isn’t something that would particularly be easy to give up. If the shares increase in value, employees can reap significant gains upon selling them.

Can’t I just grant normal share options? Why is it tax efficient?

You can grant normal (unapproved) share options, but EMI options are specifically designed to make employee ownership more tax efficient for both the business and the employee – so why wouldn’t you choose EMI if you could?

Under a non-approved scheme:

• On exercising their options, the employee has to pay income tax and NICS at rates of up to 45%*.
• On sale, CGT at up to 24%* would be due based on the Market Value, less any amounts subject to income tax.
• A CT deduction can usually be made for the company, based on the amount on which the employee is subject to income tax.

Under an EMI scheme:

• On exercising their options, if done within 10 years of the grant, with no disqualifying event, and no discount at grant, there will be no income tax or NICS on exercise.
• CGT is payable on the sale of the shares, but only up to 24%* (with the potential to claim a lower rate of 14%** Business Asset Disposal Relief, with less strict conditions under EMI).
• A CT deduction can usually be made for the company, based on the difference between the market value when the shares were acquired and the amount the employee paid for them.

*based on current rates as of October 2025

**subject to increase to 18% from 6^th April 2026

How does my business set this up?

Before granting EMI share options, a business first needs to confirm it meets the eligibility criteria. The company must be an independent trading entity with gross assets of £30 million or less and fewer than 250 full-time equivalent employees. There are also conditions relating to the employees themselves, so it is important to involve a suitably qualified tax adviser to ensure compliance before moving forward.

While there is no formal HMRC approval process for EMI schemes, it is possible to agree the share valuation in advance. This is an area where experienced advisers can add real value, helping to reduce risk and ensure the scheme is structured effectively.

Companies are required to notify HMRC within 92 days of granting options, and there is also an annual reporting requirement to maintain compliance.

You would need to consult a solicitor to assist in drafting the relevant legal documentation, such as the option agreements, to ensure the scheme is legally robust.

Will it fit the needs of my business?

One of the biggest advantages of an EMI scheme is its flexibility. The structure can be tailored to the business’s goals and workforce, allowing it to be a powerful retention and motivation tool. For example:

• The number of options or timing of exercise can be linked to individual or corporate performance targets.
• Exercise may be tied to specific events or milestones, ensuring alignment with the company’s growth objectives.

In short, an EMI scheme can be designed to fit the unique needs of each business, providing a tax-efficient way to reward and retain the employees who are most critical to its success.

Next Steps

If you’re looking for ways to retain key employees and reward their contribution to your business, an EMI scheme could be the solution. If you want to find out more, please get in touch.

Introduction

Our client approached us, intending to understand their current exposure to Inheritance Tax (IHT) and explore strategies to preserve and pass on wealth in a tax-efficient manner to their adult child who is unable to work.  Ensuring long-term financial provision for him was a central concern in their planning.

Their estate includes a mix of cash, pensions, ISAs, and property, both residential and investment. While both have UK domicile and residency, they also intend to purchase a property in UAE for seasonal use. Wills are in place but require updating, and they are seeking clarity on structuring their estate for maximum tax efficiency, particularly with their son’s welfare in mind.

The Issue

Based on the current value of their estate, we calculated an IHT liability of approximately over £1million, leaving only 67% of the estate available for distribution. Our clients wished to explore ways to reduce this liability, safeguard their son’s financial future without impacting his entitlement to benefits, and understand the implications of setting up a Family Investment Company (FIC) or trust.

Our Solution

We advised on several key strategies to reduce their IHT exposure, while preserving control and flexibility:

1. Lifetime Gifts of Cash
   The estate contains approximately £310,000 in liquid cash. We recommended making significant cash gifts now, as these qualify as Potentially Exempt Transfers (PETs). Provided they survive seven years from the date of gifting, these sums would fall outside their estates entirely. Taper relief would apply after three years for gifts exceeding the nil-rate band.
2. Regular Gifts Out of Income
   With a gross salary of over £100,000 and modest living costs, our client can make regular gifts from surplus income. Provided these are consistent and well-documented, they are exempt from IHT, regardless of value. This approach is particularly effective for long-term planning.
3. Family Investment Company (FIC)
   We explored the use of a FIC as a vehicle for holding investments, potentially funded via loans from surplus income or pension lump sums. A FIC allows the client to retain control through voting shares, while future growth can be attributed to a separate share class held by or for the benefit of their son. If the loan account is gifted, this becomes a PET, further reducing the estate’s value.
4. Use of Trusts
   Trusts offer a valuable alternative or complement to a FIC. Each client could contribute up to £325,000 without incurring an immediate IHT charge. Trusts may also be more appropriate for vulnerable beneficiaries, depending on benefit considerations and access controls.
5. Will Planning and Property Structuring
   We advised updating the wills to reflect current intentions, ensuring the main residence passes to their son. Holding the home as tenants in common and considering a co-occupation agreement may also support their goals. Plans to purchase a property in Dubai should consider whether to hold it personally or via a company, given it remains within the UK IHT net due to domicile.

The Outcome

Through a combination of gifts, structural planning, and careful estate design, our clients could reduce their IHT liability from £1.078 million to approximately £388,000, a potential saving of £700,000. This ensures a greater portion of their estate (up to 80%) is passed on, with appropriate safeguards in place for their son’s financial future.

Property VAT is one of the most complex and high-risk areas for businesses. The sums involved are large, the rules are technical, and the penalties for mistakes can be severe.

At ETC Tax, we regularly see avoidable VAT errors that lead to irrecoverable costs, HMRC disputes, or costly deal delays.

With this in mind, we have put together a checklist to help you avoid the most common traps.

1. The Option to Tax (OTT), Miss It and Pay the Price

Why it matters:

Opting to tax allows a business to charge VAT on rent or sales and reclaim VAT on associated costs (like refurbishments or legal fees). However, an OTT is only valid if properly made and recorded.

Check that:

• The OTT has been formally notified to HMRC.
• The landlord’s position is confirmed in writing.
• Accurate records of the election are kept for future reference.

Common mistake: Assuming an OTT was made when it wasn’t. We often see clients who have incurred six-figure refurbishment costs, only to find their VAT claim rejected because no valid OTT was in place.

Tip: Always confirm OTT status before incurring expenditure.

2. Transfer of a Going Concern (TOGC), Relief or Risk?

Why it matters:
Where a property sale is part of a wider business transfer, VAT may not apply if the deal qualifies as a TOGC. This saves VAT on the purchase price and reduces SDLT, but only if strict conditions are met.

Check that:

• Both buyer and seller are VAT-registered.
• The property will be used for taxable business purposes.
• Any Option to Tax is valid and in place.

Common mistake: Assuming TOGC applies without checking the conditions or obtaining VAT registration in time.

Tip: Confirm TOGC eligibility early; structuring errors can add millions to a deal.

3. Partial Exemption, Managing Mixed Supplies

Why it matters:
If your business makes exempt supplies (e.g. residential lettings, education, health, or finance), you may not be able to recover all input VAT. The partial exemption rules determine how much you can reclaim.

Check that:

• The standard method of VAT recovery produces a fair result.
• You’ve considered applying for a special method if the standard one is unfair.
• Any special method is agreed with HMRC in advance.

Tip: Specialist advice can help negotiate fairer recovery rates and defend them in HMRC reviews.

4. Overlooked Areas, Deposits, Inducements, and Break Payments

Why it matters:
Payments such as deposits, lease inducements, dilapidations, and break fees can all have VAT implications. HMRC has become increasingly aggressive in challenging incorrect treatments.

Check that:

• You’ve identified all side payments in the transaction.
• You’ve clarified whether each payment is consideration or compensation.
• VAT advice has been sought before contracts are signed.

Common mistake: Reviewing VAT treatment after signing agreements, when it’s too late to change the terms.

Tip: Early review avoids disputes and unplanned VAT costs.

Why Specialist VAT Advice Matters

Property VAT is too complex to rely on assumptions or generalist advice. Getting specialist input early protects both value and compliance.

At ETC Tax, we  have VAT specialists who provide

• Contract and lease reviews to confirm VAT treatment.

• Advice on Options to Tax and TOGC eligibility.
• Support with partial exemption calculations and HMRC negotiations.
• Guidance on complex payments (deposits, inducements, break clauses).
• Representation in HMRC disputes or recovery challenges.

Next Steps 

VAT on property can be difficult to navigate, but with the right planning, most risks are avoidable.
Missed OTTs, incorrect TOGC assumptions, poor partial exemption management, or overlooked payments can all cost thousands, but with early specialist advice from ETC Tax we can safeguard VAT recovery and keep your transactions on track. Please get in touch to find out how we can support you.

If you’ve sold a second home or investment property recently, it might be worth giving your tax return a quick once-over. HMRC certainly are.

In the past year, HMRC has seriously stepped up its checks on capital gains tax (CGT). More than 10,000 property-related investigations took place last year, the highest in half a decade. And it’s paying off. They recovered a whopping £256 million in underpaid CGT, which is 41% more than the previous year. HMRC means business.

Why the Sudden Crackdown?

After a few quieter years during and after the pandemic, HMRC is back in action. The government wants to close the so-called “tax gap” and has handed HMRC extra funding, more staff, and better tech to help them do it.

Property sales are right at the top of their hit list. When the housing market boomed after lockdown and the temporary stamp duty cuts came to an end, plenty of people decided to cash in on second homes or investment properties. But not everyone realised what that meant for their capital gains tax bill, and HMRC’s data tools have been picking up on that ever since.

Data Is Doing the Detective Work

The old days of paper records and manual checks are long gone. HMRC now uses powerful data systems that pull information from banks, investment platforms, the Land Registry and even overseas tax authorities.

Thanks to artificial intelligence and data analytics, they can quickly spot patterns and red flags that might point to undeclared gains.

This isn’t just about clawing back unpaid tax. It’s part of a bigger shift towards smarter, data-led compliance. And with more trained investigators and better digital tools at their disposal, it’s safe to say property tax checks are only going to increase from here.

What You Should Do

If you’ve sold a second property, an inherited home or a buy-to-let recently, now’s the perfect time to make sure your CGT reporting is spot on.

Here’s how to stay ahead:

• Check your records: Take a close look at sale prices, purchase costs and any allowable expenses.
• Report on time: Most UK residential property sales need to be reported within 60 days.
• Get advice early: A quick chat with an adviser can help you catch and fix any issues before HMRC gets in touch.

With HMRC’s technology and data sharing now sharper than ever, keeping things accurate and up to date is essential. And if anything feels unclear, getting professional advice can save you a big headache later on.

Need some help? Get in touch and we’ll make sure everything’s in order.

A recent survey of small business owners has revealed that eight in ten of them have no exit plan. This is even though life, health, and market conditions may sometimes dictate exits before an owner is ready.

Many entrepreneurs understandably feel a deep emotional connection to their business, especially when it has been built from scratch. However, failing to plan an exit can have serious consequences for both value and tax efficiency.

Then, if you are forced into a position without having taken the time to think about the consequences, well that may not end well.

The valuation problem

One of the main challenges reported by business owners was uncertainty around valuation. How much is my business worth? How do I know if I am getting a fair value for it?

These are often difficult questions to answer without the context of what a potential buyer might actually pay. But valuation is not just about market value. For tax purposes, HMRC also applies its own rules when looking at a sale or succession, which can affect how reliefs apply and what the eventual tax liability looks like.

Asset sale vs share sale

Another key decision is whether the exit will be structured as a sale of the company’s shares, or of its underlying assets. Each route has different implications: a share sale is usually simpler and may be more tax-efficient for the seller (for example, potentially qualifying for Business Asset Disposal Relief. However, an asset sale can be more attractive to the buyer, who may prefer to “cherry-pick” assets without inheriting company liabilities, but this is often less efficient for the seller, as tax charges can arise both within the company and on extraction of proceeds.

Pre-sale tax health checks

The survey also noted that only a fifth of business owners have ever sought professional advice on a sale.

This is where a pre-sale tax “health check” from ETC Tax comes in. Such a review typically covers:

• Obtaining a professional valuation to set realistic expectations.
• Checking eligibility for Business Asset Disposal Relief (and restructuring shareholdings where possible to optimise relief).
• Reviewing the company’s structure – for example, whether subsidiaries or non-core assets could and should and be removed prior to a sale.
• Planning around loan accounts and dividends to avoid unexpected tax charges.
• Reviewing the balance sheet to deal with excess cash, inter-company loans, or property that may complicate a deal.
• Carrying out “self-diligence” to make sure that the tax affairs of the business and its owners are in order before a buyer’s due diligence highlights problems.

Beyond sale, succession and wind-down

Interestingly, the survey also found that many owners consider simply “handing” their business to family, or even winding it down.

But even these options may come with their own tax considerations. Passing a business to the next generation may mean that certain inheritance tax reliefs, such as Business Relief, apply but only if conditions are met and changes are coming from April 2026.

Equally, winding down without a sale may mean leaving value on the table. However, if that is the chosen route, careful planning can ensure extraction of cash is effected tax efficiently, whether through capital treatment on liquidation or planning for distributions.

Conclusion

The survey highlights a worrying truth: most business owners are unprepared for their own exit. Hmmm…

But whether the objective is a sale, succession, or simply winding-down, the earlier planning starts, the more control the business owner has over value, timing, and tax outcomes.

If you have any queries about this article or in relation to business exit planning and valuations, or would like to enquire about a pre-sale tax health check (it’s never too early!) then please get in touch.

Major reforms to inheritance tax (IHT) are set to take effect in April 2026 and April 2027, with significant implications for business owners and investors. The government’s changes to Business Relief (BR) (formally known as Business Property Relief) could largely increase the taxable value of many estates. With IHT charged at 40%, the stakes are high.

This article explores what’s changing and why it matters for you.

APRIL 2026

What’s changing with Business Relief?

Currently, Business Relief allows shares in trading companies or trading groups to be passed on free of IHT. Broadly, in practice, this means:

• If someone owns shares in a trading company (or a qualifying trading group) worth £10 million, the full £10 million is exempt from IHT.
• The value is treated as being outside of their estate when they die.

From April 2026, however, the rules will change:

• Only the first £1 million of value will qualify for the BR exemption.
• Any value above £1 million will still qualify for BR, but at a reduced rate of 50%. The remaining 50% will fall into the estate and potentially face a 40% IHT charge.
• There is currently no ability to transfer the £1m allowance onto a spouse or civil partner.

This means that from April 2026, 50% of £9m of a £10m business could be taxable, creating an IHT liability of £1.8m on death.

This represents a significant shift in how business wealth is taxed, highlighting the need for proactive planning before April 2026 for business owners.

How These Changes Apply to Agricultural Relief

Agricultural Relief works similarly to Business Relief, providing up to 100% exemption from IHT for qualifying agricultural property. However, like Business Relief, Agricultural Relief will also be affected by the tightening of rules in the same way.

Agricultural relief is primarily available in two scenarios;

• To a farmer who owns the land and buildings and uses them in their own business; and
• To a landowner who is letting out agricultural land or buildings to a farmer.

APR already requires strict eligibility conditions, so landowners and farmers should review whether their property qualifies under current rules and explore succession strategies before any changes are implemented.

APRIL 2027

Pensions and IHT

Pensions have long been a valuable tool in succession planning because, under current rules, unspent defined contribution pension pots were outside of the estate for IHT purposes. This means they can pass to beneficiaries without facing inheritance tax.

Current Rules

In defined contribution schemes, any unused scheme funds can normally be passed on and paid out to beneficiaries in the form of death benefits.

In defined benefit schemes, there is no dedicated fund that can be inherited, but there may be specific death benefits which become payable, such as a lump sum death benefit or a set amount of pension to a dependant.

Generally, if the pension holder dies before age 75, beneficiaries can usually take the remaining pension funds tax-free.

If death occurs after age 75, benefits are not subject to IHT, but they are taxed at the beneficiary’s marginal income tax rate when withdrawn.

Upcoming Changes

The government has announced significant reforms that will impact pensions and inheritance tax:

• From 6 April 2027, most unused pension funds and death benefits will be included within the value of the estate for IHT purposes.
• This means they could be subject to a 40% IHT charge. For those who pass after age 75%, this would apply then before any income tax is applied, creating a potential double taxation issue.

For example, if a pension holder dies after age 75 with £100,000 in their pension pot, and the beneficiary is an additional rate taxpayer, the effective tax rate could be as high as 67%, with only £33,000 remaining for the beneficiary.

These changes mean pensions will no longer be a guaranteed IHT-free inheritance, and they are likely to become a core part of estate planning discussions going forward.

It is driving individuals to now reconsider their retirement plans, particularly concerning how they fund their lifestyle. This was one of the aims of the government’s decision – to ensure pension pots are being used for their intended purpose: to provide for retirement, rather than being used primarily as tools for passing on tax-free wealth.

What other changes are on the horizon?

The Autumn Budget 2025 is attracting significant attention, with Chancellor Rachel Reeves expected to make large changes amid speculation of substantial tax increases under the Labour government. While inheritance tax (IHT) was a major focus of the previous budget, this year’s budget is likely to prioritise other taxes. Nevertheless, some IHT reforms may still be introduced. Analysts have identified several potential areas of focus:

• The freeze on tax-free allowances (nil-rate bands) was previously extended until 2030, which continues to expose estates to the effects of fiscal drag. It’s possible this freeze could be extended further.
• Under current rules, individuals can make lifetime gifts free of IHT provided they survive for seven years after the gift. There is currently no limit on the value of these gifts if this timeframe is met.

There is discussion within the government about tightening these gifting rules, which could potentially include a lifetime cap on amounts that can be gifted before death.

• Taper relief currently reduces the rate of IHT applied to gifts if the donor dies between three and seven years after making the gift. There is the potential for them to reconsider this relief.

Given the pace of potential reforms, individuals should review estate planning strategies now rather than wait for the Autumn Budget.

Here at ETC Tax, we understand that these upcoming inheritance tax reforms will affect individuals in different ways depending on their circumstances. We can discuss your specific situation, explain how these changes might impact you, and help identify strategies to protect your wealth and achieve your estate planning goals. Do not hesitate to get in touch today if you would like to discuss your affairs.

Tax-Efficient Restructure and Family Wealth Planning

Introduction

Our client, the owner of a successful group of businesses, received an offer to sell the entire issued share capital of their main trading company for approximately £4 million. With no immediate need for the sale proceeds, they sought to reinvest the funds for the long-term benefit of their family in a tax-efficient manner.

The group structure included a trading company with around £2 million in cash reserves, a subsidiary generating approximately £500,000 in annual turnover, a property company holding investment and operational properties, and a separate LLP used to contract with clients. Staff were employed through a management company, and shares were held by both the property company and family members.

The client’s goals were to extract value from the business efficiently, ensure the sale would qualify for Substantial Shareholding Exemption (SSE), and explore estate planning options, including potential IHT mitigation through trusts.

The Issue

The primary objective was to restructure the group to allow the sale of the business in a way that would qualify for SSE, avoiding corporation tax on the gain. At the same time, the client wished to release and reinvest the group’s retained profits, particularly into the family’s property company, without incurring unnecessary tax charges. Given the group’s operational and ownership complexity, there were multiple considerations, including goodwill treatment, shareholding structure, and future IHT exposure.

Our Solution

We advised our client to hive down the trade and assets of the main company into its wholly owned subsidiary. This would allow the parent company to dispose of the subsidiary while qualifying for SSE, assuming all relevant conditions were met.

We confirmed SSE should be available, as the subsidiary was trading and wholly owned. We also reviewed the correct accounting treatment of goodwill and ensured that the hive-down transaction would not trigger anti-avoidance provisions, provided the sale occurred in line with the timeline and substance requirements.

Practical challenges, such as the involvement of the LLP, the VAT group, and the employment structure, were addressed to ensure a clean transfer of operations into the subsidiary. After the sale, the parent company would declare a significant dividend, expected to be £5–6 million, to the property company. These funds could then be reinvested into additional property or other assets for the family’s benefit.

In parallel, we reviewed the client’s IHT position and advised on the potential use of family trusts and other planning tools to reduce exposure, preserve wealth, and ensure long-term succession planning.

The Outcome

The restructure enabled our client to qualify for SSE, allowing for a tax-efficient disposal of the subsidiary. The dividend strategy provided a clean and efficient way to move profits into the property company for reinvestment. Our IHT advice laid the groundwork for future planning and asset protection.

Overall, our client achieved a simplified exit, efficient profit extraction, and a clearer path toward multigenerational wealth preservation.

Introduction

A tribunal decision has compelled HMRC to disclose whether it relies on artificial intelligence (AI) in processing research and development (R&D) tax credit claims, raising fundamental questions about transparency, accountability, and fairness in government decision-making.

The First Tier Tribunal’s ruling in Thomas Elsbury [2025] UKFTT 915 (GRC) follows HMRC’s refusal to confirm or deny its use of AI, citing exemptions under the Freedom of Information Act. The tribunal found this stance untenable, warning that secrecy undermines public trust and risks deterring legitimate claimants.

Judge observations pointed to signs of automated involvement, such as correspondence containing American spellings, suggesting machine-generated language may have been used. The ruling emphasised that concealment of AI in high-stakes assessments threatens confidence in the tax system and could frustrate the policy aims of the R&D scheme.

Transparency, accountability, fairness under the microscope

The decision brings three key risks of government AI use into sharp relief:

• Transparency: Failure to disclose AI use leaves taxpayers uncertain about how critical financial decisions are made.
• Accountability: Concerns were raised that HMRC officers may be informally using AI tools without oversight, creating gaps in governance.
• Fairness: Unlike human assessors, AI often operates as a “black box,” making it harder for claimants to understand decisions or mount effective appeals.

Implications for R&D claimants

For businesses seeking R&D tax relief, this ruling is both a safeguard and a warning. On one hand, companies now have stronger legal grounds to demand clarity over whether AI influenced their claims. On the other hand, the judgment reveals that some claimants may already have been subject to automated processing without their knowledge.

Given HMRC’s intensified scrutiny of R&D claims, highlighted by a 23% year-on-year fall in SME applications as of September 2024, the potential use of AI raises further concern. If automated systems reject claims without grasping the nuances of innovation, genuine projects could be unfairly dismissed, discouraging startups and scale-ups from applying altogether. These risks undermine the scheme’s original purpose: to stimulate UK innovation.

AI’s own view of its limits

When asked to reflect on its suitability for tax assessments, one AI system admitted serious shortcomings: a lack of contextual understanding, susceptibility to data bias, and opacity that complicates appeals. While AI can improve consistency and efficiency, it cannot replicate the nuanced judgment required for complex R&D determinations. The system itself recommended “human-in-the-loop” models where technology assists but does not replace human decision-makers.

Beyond HMRC: wider lessons for government

The Elsbury ruling sets a precedent that could extend across public administration, from welfare benefits to planning and licensing. It confirms that government departments cannot rely on secrecy when AI is used in decisions affecting citizens’ rights and livelihoods. Courts are willing to intervene where safeguards are absent.

This points to an urgent need for a robust AI governance framework in government covering disclosure, oversight, and appeal mechanisms. Without these, automated decision-making risks eroding trust in public institutions.

Looking ahead

AI should play a supporting role in government administration, not a decisive one in matters with significant financial or personal impact. For HMRC and beyond, the path forward lies in transparent disclosure, clear accountability, and models where humans remain firmly in control.

AI in the tax industry more broadly

The tax industry is increasingly exploring AI applications beyond R&D relief processing. AI is already assisting with fraud detection, data analytics, and compliance monitoring, offering potential benefits in efficiency and consistency. However, the challenges highlighted in this ruling echo across the sector:

• Complexity of tax law: AI struggles with interpreting nuanced legislation and case-specific contexts, areas where human expertise remains indispensable.
• Risk of bias: Training data may embed systemic biases, leading to unfair outcomes in tax assessments or audits.
• Trust and transparency: Taxpayers must have confidence in the integrity of the system. If decisions appear to be outsourced to opaque algorithms, public trust could erode rapidly.
• Opportunity for augmentation: Properly designed, AI can serve as a powerful tool for human tax professionals by flagging anomalies, analysing large datasets, and streamlining routine checks while leaving judgment calls to trained officers.

In short, AI’s future in tax lies not in replacing human judgment but in enhancing it. Governments and firms alike must prioritise oversight, disclosure, and accountability to ensure AI supports, rather than undermines, the fairness and legitimacy of tax administration.

Q

I would like to confirm the correct VAT treatment of services provided from overseas suppliers to a GB VAT-registered business with a UK place of residence.

From my understanding, where the service is provided by a company registered abroad, even if they have a GB VAT number, the treatment should be reverse charge. However, there are occasions where the service provider isn’t aware they are providing the service to a VAT registered customer, and they issue an invoice at 20% VAT. Should this then be processed at 20%, or should all services from abroad be marked as reverse charge? We want to ensure that clients aren’t reclaiming VAT in error.

A

In this case if the UK business is receiving supplies from a non-UK supplier the reverse charge procedure should apply despite the supplier being registered in the UK as a non-established taxable person.

VAT Notice 741A section 5.17 explains:

5.17 What to do if my supplier has a UK VAT number and raises a VAT invoice

If you receive a supply to which the reverse charge applies and yet your non-UK supplier issues a VAT invoice on a UK VAT registration, you must still apply the reverse charge as it is not an optional adjustment. You should advise your supplier to amend or correct their invoice appropriately.

Q.

Can I have please list of all products that can be sold in restaurants and supermarkets that is Zero and 5% rated.  I also need guidance around rules and regulations around it.

A.

There is no generic list of products sold in restaurants and supermarkets and the VAT rate that is applied to each product however the following should assist:

Q.

A new client has this scenario.

He was an IT contractor company, shares 5% owned by husband, 95% by wife, both are directors. The company was active from February 2023 to November 2024, I assume therefore no BADR is available.

There is a surplus of around £120k in the company and the client wishes to use it to invest in buy-to-let.

Husband is now under PAYE and is a higher rate taxpayer, looking to avoid higher rates on rental income, wife also under PAYE earns £36k. Live in Scotland.

Is it better to use the existing company with the cash for the buy to let or set up a new company? If BADR was available would an MVL and then set up a new company to invest be an option? Or something else?

A.

Your clients wouldn’t qualify for BADR as the company hasn’t traded for two years.

I’m not sure of the rationale for the 95%/5% share split in favour of wife as husband presumably did all the work and wife has earnings anyway. However, as husband is presumably now doing a similar job through PAYE, HMRC may seek to apply the TAAR (Phoenixing) rules if the company is liquidated.

It would be safer to use the existing company for the property investment to avoid any potential issues. The higher rates of SDLT/LBTT will of course apply but interest relief available in full and presumably surplus income that isn’t needed can be accumulated within the company.