There are many ways of inducing people to make tax payments and complete returns. In the past HMRC relied mainly on fines and threats, but it also often now uses less aggressive tactics. For some time, the Behavioural Insights Team (aka the Nudge Unit) has been advising HMRC on more subtle means of encouraging cooperation. Given that Richard Thaler, one of the founders of Nudge psychology theory, recently received the Nobel Prize in Economics for his work, this approach seems to be worth an examination.
Essentially, effective nudge interventions encourage individuals to behave in a desired way by their own decision, although they do not make them do anything. A nudge should be:
- easy – sending a taxpayer a link to a form, rather than a link to a page which had a link to a form increased response rates by 4 per cent;
- attractive – a generic letter reminding medical staff to declare extra earning got only a 4 per cent response rate, but when they sent one specifically referring to doctors and medics, noting they often had extra earnings, the response rate rose to 21 per cent;
- social – adding the statement that most people in the local area had already paid their tax in time, to the demands sent to late payers, increased payment rates by 5 per cent; and
- timely – a text 10 days before the bailiffs were due to collect court fines increased payment rates by two to three times.
Since, in the main, the interventions involve rewriting letters which were due to be sent anyway, these increases in response can be obtained very cheaply, making good economic sense.
So, next time you get a letter from HMRC that seems helpful, rather than telling you off as they used to, you will know why.
One can only admire an initiative which increases tax recovery without causing pain to taxpayers, or being expensive. If such small adjustments can improve compliance, it raises questions about what other innovations could replace or reduce the main current approach of fines and penalties, which often seem to fall heaviest on more innocent taxpayers. The more HMRC can induce willing participation the better for all of us.