Closed consultation

The Tax Administration Framework Review – Creating innovative change through new legislative pilots

Published 27 April 2023

1. Background

1.1. This is one of two Tax Administration Framework Review (TAFR) documents published today as part of a series of engagement with stakeholders to support reforming legislation around key elements of tax administration. The other document is ‘The Tax Administration Framework Review: Information and Data’. This follows the earlier publication at Spring Budget of a TAFR document on ‘Simplifying and modernising HMRC’s Income Tax services through the tax administration framework’. Your views will help shape proposals to make our tax system simpler, easier for customers to engage with and fit for the future.

1.2. In July 2020, the government published a 10-year strategy to build a trusted, modern tax administration system which included a commitment to publish a Call for Evidence on the legislative framework underpinning tax administration. That Call for Evidence was published on 23 March 2021 and a subsequent summary of responses was published on 30 November 2021. Respondents to the Call for Evidence expressed views that HMRC could be more transparent in developing policy and take a more collaborative approach to delivering change. Some stakeholders have suggested we look at ‘sandbox testing’; this is a way used by various organisations already to test and refine new ideas, by piloting them in restricted environments before rolling them out more widely.

1.3. This discussion document is the next stage in that conversation; it explores how the possible use of a HMRC sandbox piloting model could achieve change more collaboratively. It seeks views on a bespoke piloting and testing approach which focuses on giving HMRC the legislative ability to gather the evidence needed to make informed, innovative policy changes where needed.

2. Summary

2.1. HMRC recognises the value of taxpayer insight and the benefits of developing policy thoroughly and collaboratively wherever practicable, and so we are exploring the use of novel piloting approach defined as:

a temporary environment where HMRC could conduct tests of new policy and processes which suspend, implement, ease and/or harmonise legal obligations. This could be for a distinct group of people or sector for a defined period of time and would be accompanied by appropriate safeguards and guidance.

2.2. This discussion document requests feedback on the challenges and benefits of this proposed legislative piloting approach before considering whether to implement it in HMRC.

3. Sandbox testing

3.1. Sandbox testing supports innovation in different ways. Generally, there are 2 forms of sandbox testing. These are:

3.2. ‘Regulatory sandboxes’ are used by regulators to allow innovation and test new products or services. Specific regulations may be relaxed and/or additional safeguards granted to allow trialling of new processes or products. These are commonly found in the financial technology sector; for example, the Financial Conduct Authority uses the regulatory sandbox approach

3.3. ‘IT Sandboxes’ test potential information technology solutions. They take one of two forms: one that uses an Application Programming Interface (API), or a digital sandbox. The API approach is used by several government departments, including HMRC’s Developer Hub. Digital sandboxes are usually wider in application and can include the use of APIs and other data sources

4. Proposed approach to legislative and policy development

4.1. Given HMRC’s legal role in the administration and collection of taxes the two established sandbox testing models, referenced above, would not provide full opportunity to innovate in tax administration.

4.2. This is why HMRC is proposing a new piloting approach which would allow the creation of temporary legislation to suspend the usual tax administration rules for an identified section of the taxpayer population in time-limited pilot schemes. The outcomes would then be evaluated to inform future decisions on adopting the change permanently.

4.3. This proposed piloting model would provide opportunities to innovate and develop new tax administration policy and processes. HMRC recognises there may also be some challenges and risks to this approach. Both the opportunities, challenges and risks are:

• opportunities:

  • more innovative solutions to policy challenges could be explored in a range of pilots – potentially at the same time

  • design of more effective policy and processes, resulting in better outcomes for taxpayers, intermediaries and HMRC

  • containment of the test to a bespoke group before wider roll-out

  • reduced administrative burdens for participants where the data provided within a pilot could be reused when any new scheme went live

• challenges and risks:

  • selection method of taxpayers for participation in pilots may not be representative

  • there may be costs associated with participation in a pilot, and for HMRC in running a pilot

  • taxpayers in a pilot could be subject to different rules from those not in the pilot

  • intermediaries may face challenges in supporting customers who take part in a pilot and experience different processes

4.4. The flexibility of our proposed testing approach could allow for more transparent policy and process development. We could explore ‘a showcase space’ where ongoing pilots could provide progress reports seeking input from participants.

4.5. Delivering changes simultaneously can be challenging. The explored approach could accommodate several linked changes at once. This could allow identification of linked issues, to ensure all policies and process changes operate as intended.

4.6. Safeguards would include time limits, guidance and ensuring the relevant support is available. Bespoke safeguards tailored to a specific pilot could also be considered.

4.7. Our approach could support the involvement of intermediaries, agents, taxpayers, and third-party experts. We want to explore where it would be appropriate to randomly select participants or to seek volunteers to ensure an accurate reflection of views and experiences.

5. What might HMRC’s legislative piloting approach look like in practice?

5.1. The hypothetical examples below illustrate how the new piloting approach could operate.

Example 1: Pre-population

A pre-population pilot identifies gaps in the available taxable turnover data, reducing effectiveness of prepopulating specific sections of a particular tax return. The proposed approach could allow the suspension of current filing requirements for a sample of taxpayers. Safeguards will ensure that any penalty for failing to provide the information or data required could be set aside.

Example 2: Piloting for more effective taxpayer response

Late filing penalties is identified as an area where improvements could be made to both the process and the effectiveness of the penalty regime. A legislative pilot could test proposed changes with a section of the taxpayer population, where the penalty is reduced to a nominal amount.

Within the pilot, current legislative requirements can be set aside for an agreed period. Instances of late filing and how late the filing occurs are then monitored to measure if the new approach to penalties effectively encourages the desired taxpayer behaviour. Comparisons can then be made to identify any benefits or challenges with the revised approach and the results can form part of the decision process on wider implementation.

6. Suggested discussion areas

6.1. We would welcome any thoughts or comments relating to HMRC’s proposed Legislative Approach to Piloting. The following points are suggested as potential areas for discussion:

1. What benefits and challenges do you think piloting potential policy and process changes in this way would bring?

2. What safeguards would you like to see in the operation of pilots conducted within the proposed approach?

3. In addition to the ‘showcase space’ outlined at paragraph 4.4., are there any other ways you would want to engage in the development of new policy, processes, and legislation?

4. What areas of HMRC activity do you think would benefit from this type of approach?

5. What participant support and oversight would you like to see?

7. How to respond/further discussions

Responses should be sent by 20 July 2023, by email to tafrlegislation@hmrc.gov.uk

We also intend to arrange a number of meetings to discuss the ideas explored in this paper. If you wish to attend one of these meetings, please let us know.

Paper copies of this document in Welsh may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.