Testing, testing – HMRC ponders a new piloting approachby
HMRC's new 'sandbox-based' approach to piloting changes to the tax system could offer keen insights to the tax authority. However, many unanswered questions and potential pitfalls for taxpayers and agents still remain, writes Helen Thornley.
Back in April, as part of a discussion document titled Creating innovative change through new legislative pilots, HMRC proposed the idea of a legislative sandbox as a new way of piloting changes to the tax system. What could this mean for taxpayers?
What is a legislative sandbox?
In computing, a sandbox is an isolated part of a computer system where new software can be tested without risk of damage to wider systems. In HMRC’s proposals, a legislative sandbox is a form of pilot where HMRC would suspend the usual tax rules for short periods for small groups of taxpayers. Those selected would follow different rules to test and refine them before they are rolled out to the rest of the population.
In discussions, HMRC explained that while they expected most pilots would be done with volunteers, they would want any new rules to permit compulsory selection to ensure they have a representative sample of taxpayers for some studies.
Implications for taxpayers
In discussions, HMRC told us that pilots would mainly focus on administrative changes and those in a pilot would not be financially worse off than the rest of the population. In HMRC’s view, this means keeping the tax liabilities for those in a pilot the same as those outside them. However, those in the pilot could potentially be exposed to different penalties or interest charges, so from the perspective of the overall financial cost to the taxpayer, there may be differences between those in or out of the pilot.
The proposals bring a number of challenges for taxpayers and their agents. Those in a pilot will need to spend time familiarising themselves with their new obligations and may incur costs if they have an agent who has to do likewise. We consider that no one in a pilot should be worse off as a result of taking part, and that there should therefore be some form of financial compensation for those involved, which also covers any extra agent fees.
We also think that participation in a pilot should be voluntary. If the pilots are made compulsory, then there should be permitted opt-outs, similar to those provided in jury service.
To ensure that those in a pilot are treated fairly, and that any changes to their tax affairs are not too onerous, we’d also like any proposed pilots to be reviewed by an independent oversight board to help ensure that HMRC is upholding their Charter obligation to treat taxpayers fairly.
Is there another way?
While it is clearly important that HMRC are able to fully test new ways of doing things, it was disappointing that HMRC was unable to provide any specific examples of recent situations where they think a legislative sandbox could be beneficial for taxpayers. This might have made for a more compelling argument for this approach.
In our view, following issues with new services such as the new VAT registration service, the CGT on UK Property Service and the Trust Registration Service (TRS), there are plenty of other steps HMRC could take with existing processes to improve the launching of new policies or services.
Ask the experts
When HMRC launches a new product or service, it does do a lot of user testing, but the testing we end up engaging with is usually focused on the user experience - i.e. is it clear to a taxpayer which box to tick, or where to go next? In the testing we have seen, there is no emphasis on whether or not the system makes sense to experienced tax practitioners and allows taxpayers to comply with the underlying legislation.
We think that there needs to be more testing of whether systems actually do what they need to do and if they match the underlying legislation. We called this Ronseal testing – does the system do what it says in the TIIN? This might have helped with the development of the TRS by highlighting at an earlier stage the gaps between the requests for information in the system, and the information that the legislation requires.
We’d also like to see testing of how new or changed processes might fit into the agent workflow. For example, we frequently have to request the inclusion of a ‘save and return’ function in new services to allow for more senior review and client approval before documents are submitted to HMRC.
Protecting those outside the box
Where we do think the idea of placing some taxpayers in a safe environment outside the usual rules could be useful is not in piloting, but when new systems or processes go live. Instead of a testing sandbox, this would be a shielding sandbox, giving HMRC the power to grant exemptions or exclusions for those who can’t immediately access new systems or processes.
When the new VAT registration service was launched last year, not everyone who needed to use it was able to do so – and it took a year before the TRS was upgraded to take into account all the new trusts required to register under 5MLD. That meant that trusts wound up after 6 October 2020 when the new rules took effect - but before 1 September 2021 when the system finally opened to non-taxable trusts - were obliged to register and then immediately deregister themselves once the system was live, even though the trust no longer existed. A shielding sandbox could have exempted those trusts from this onerous obligation.
At the ATT, we are unconvinced by the current sandbox proposals and are concerned about the potential extra costs in time and money for taxpayers selected for such a pilot. We think that HMRC should take a step back from this specific idea to look in more detail at some of the problems experienced by taxpayers, agents and HMRC as a result of some recent policy/operational changes. Better outcomes could be obtained by expanding and developing HMRC’s existing testing approaches.
The ATT’s full response to the consultation is available on our website.
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Helen Thornley has a focus on personal and capital taxes. Initially training as an accountant before moving to tax, she worked in practice until her appointment as a technical officer in 2017. She also has an interest in the history of tax.