On 27 April 2023 the UK published a consultation document with the title The Tax Administration Framework Review – Creating Innovative Change through New Legislative Pilots.

The document looks at the use of a “sandbox” piloting model involving a bespoke piloting and testing approach to gather the evidence needed for policy changes under consideration.

HMRC is considering the use of a new piloting approach involving a temporary environment where new policy and processes could be tested. This might involve a distinct group of people or sector for a certain length of time and there would be appropriate guidance.

Sandbox testing

Currently, regulators can make use of ‘regulatory sandboxes’ to test new products or services. Under this procedure specific regulations could be relaxed or additional safeguards granted so that the new products could be tested. This type of testing is often carried out in the financial technology sector by bodies such as the Financial Conduct Authority.

There are also ‘IT sandboxes’ which are used to test potential information technology processes. These may use an Application Programming Interface (API), which is used by some government departments, or a digital sandbox. These digital sandboxes are generally wider in application and can also include APIs and other sources of data.

HMRC’s proposed approach

The new piloting approach proposed by HMRC would allow the introduction of temporary legislation that would suspend the usual tax administration rules for a certain defined group of taxpayers. The outcomes of these time-limited pilot schemes could be evaluated to assist in the decision-making on whether to adopt the change permanently. New tax administration policy and processes could be developed by this method.

HMRC considers that by using this sandbox approach more innovative new approaches could be tested, and a number of different solutions could potentially be tested at the same time. Each test would be restricted to a defined group before a decision is made on rolling it out more broadly. Any administrative burden for the participants could be reduced by allowing data to be re-used if the process is applied more broadly.

HMRC could provide a showcase space where ongoing pilot schemes would be able to provide progress reports and invite input from scheme participants.

Potential risks

Potential risks would arise because the taxpayers taking part in the pilot scheme would be subject to different rules from those outside the pilot. The selection method for each pilot would need to ensure that the participants are representative of the wider group to which the process might eventually apply. There would be costs for the participants and for HMRC in running each pilot. The intermediaries representing taxpayers could find themselves dealing with a number of different sets of rules.

There would be safeguards in place including time limits, guidance and support. There could be specific safeguards in place tailored for particular pilots.

Comments are invited by 20 July 2023 on potential benefits and challenges, safeguards, taxpayer support and areas of activity that could benefit from the sandbox approach.