USE OF BEHAVIOURAL PSYCHOLOGY BY TAX AUTHORITIES
Tax authorities in several jurisdictions use behavioural psychology to advance tax compliance.
The National Taxpayer Advocate has published a paper
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Behavioral Science Lessons for Taxpayer Compliance
The National Taxpayer Advocate has long recommended the IRS conduct behavioral research on ways to improve voluntary tax compliance. The President also recently issued an Executive Order encouraging agencies to apply behavioral science insights to advance policy goals.
For example, the IRS could use these insights (i.e., insights from psychology, anthropology, sociology, market research, and behavioral economics) to improve tax compliance by making it easier, or by making the agency’s messages clearer, more relevant, and more likely to resonate with taxpayers. These insights could improve the effectiveness of alternatives to “enforcement” (called “alternative treatments”).
The paper cites 183 studies into tax compliance and behavioural psychology.
UK TAX AUTHORITY USE OF BEHAVIOURAL PSYCHOLOGY
Use of behavioural psychology by HMRC – the UK tax authority – is well established:
CH600130 - The One to Many Approach: introduction: why use a one to many approach?
HMRC have developed the compliance strategy based on the many forms of non-compliance among our customers.
We could have a significant number of customers who are at risk of being non-compliant in a similar way but we may not have sufficient resource or a great enough risk to justify opening a traditional compliance check into each customer. In these cases we might use different types of interaction with the customers to change any non-compliant behaviour. A well planned OTM approach can be extremely effective in changing how our customers think about their tax affairs both before they interact with us and after. The examples at CH600140 show some of our successful campaigns and the results they can bring in.
Where there are risks to compliance and a one-to-one approach would not be cost effective, we can use an OTM approach to reach a large number of customers. For example, we can:
· highlight specific errors that we often see customers make, and direct customers to guidance to help them correct these
· large scale downstream activities where we offer a voluntary disclosure as opposed to the traditional One-to-one interventions to impact a larger population that would normally be possible
· provide a reminder or prompt for a particular behaviour, for example a deadline or a debt.
An OTM approach won’t work with all customer groups. There is potential for a badly thought out approach to have an adverse effect on customer compliance and also create reputational risk for HMRC. It is therefore important that you establish that it is the right approach to take in the circumstances. This guidance will help you to decide if an OTM approach is appropriate and tell you how to get the approvals required.
CH600150 - The One to Many Approach: introduction: what are behavioural insights?
Behavioural insights describe how people actually behave and what influences decision making. Behavioural insights largely come from behavioural science and applications of that science. Behavioural science disciplines include behavioural economics, social psychology, and design thinking. The behavioural study of tax compliance is a field in its own right.
A frequent misperception is that behavioural insights solely consists of ‘nudges’, usually in written communications. In fact the use of behavioural insight in government ranges widely across policy, service design and communications. In the UK we have redesigned the entire system of private pension provision using behavioural insights and £4 bn more was saved in the first full year of operation. HMRC has been using behavioural insight in different areas of the organisation since 2000.
This guidance focuses on what is useful for you to know when designing and delivering such activity and highlights where there are experts in HMRC who can support this.
As the UK’s Daily Telegraph reports by Kate Palmer (October 9, 2014):
Psychology and 'nudges': Five tricks the taxman uses to make you pay £210m extra
We explain the psychological tricks and techniques HMRC employs to make you pay tax quickly – adding hundreds of millions of pounds to the public purse
The taxman claims to have gained an extra £210m from taxpayers by using controversial “nudge” tactics that predict how people will respond to official communications and encourage them to make the “right” response...
Stuart Petrie of AAB writes (April 24, 2018):
https://aab.uk/blog/hmrcs-latest-tactics-a-nudge-too-far/
HMRC are increasingly using a new tactic called ‘nudge letters’ to target different taxpayer groups. The basic theory is that human behaviour can be influenced by emotional drivers such as a need to conform or feeling guilt. As such by providing a ‘nudge’ to both entirely compliant and non-compliant taxpayers, it might provide an incentive to everyone to question themselves and get their tax affairs in order.
One such letter that has recently been sent to taxpayers is a warning about the impending sharing of data between countries party to the 2018 Common Reporting Standard. The letter suggests that the client appears to have offshore assets and recommends that a disclosure under the Worldwide Disclosure Facility be considered.
However, nudge letters have also been considered controversial by many, as it is often not clear from the content of the letter whether it has been sent out randomly or to specific individuals who HMRC believe have not complied with their obligations. Moreover, in some cases HMRC are bypassing agents and instead are writing to taxpayers directly and this has been construed as an attempt to apply improper pressure. Where law-abiding taxpayers have disclosed everything properly are targeted unnecessarily it can be questioned whether this approach to tax compliance is truly justifiable.
So what should you do if you receive one of these nudge letters? Well first and foremost, it is important not to panic. HMRC are not exercising any statutory power by sending out these letters meaning taxpayers are not under any obligation to act upon it, especially if their tax affairs are up to date. If on the other hand, the letter reminds you of something you should have declared but have failed to do so, it can be a perfect opportunity to take advantage of more favorable terms for making a voluntary disclosure rather than facing investigation by HMRC and tough penalties as a consequence.
INCITING SUICIDE
“Nudge” tactics are supposed to encourage rational compliance. Not incite suicide. Yet the UK tax authority has now been accused of doing exactly that.
The Loan Charge Action Group has published an open letter:
https://www.hmrcloancharge.info/wp-content/uploads/2020/06/Letter-to-Mind-from-LCAG-HelpLine.pdf
Dear Mr Farmer
We are writing to you, as mental health volunteers on the Loan Charge Action Group (LCAG) Helpline, a crisis helpline which we felt compelled to establish to support members of the freelance community who are being targeted by HMRC for retrospective tax demands.
The issue of the Loan Charge is an extremely complex one and perhaps not widely understood. However, for the purpose of this communication you should know that LCAG was formed by ordinary people who felt victimised and threatened by HMRC demanding vast sums of tax from them, never legally proven to be due, going back over 20 years.
For over 3 years, LCAG members have contacted and spoken with their MPs to discuss the impact that the threat of the Loan Charge has had on themselves and their families. This impact includes breakdowns, miscarriages, divorces, health issues and even 7 suicides - all related to the pressure people are facing from HMRC as a result of this retrospective tax. Over 230 cross party concerned MPs have shown their support by joining the Loan Charge All Party Parliamentary Group, all of whom have taken the time to understand the issue and written various reports on the subject.
In one of the evidence sessions to the APPG, the family of one Loan Charge Victim shared his suicide note which spoke of the love he had for his family but what he mostly referred to was himself. He wrote about being at the end of his tether with the Loan Charge matter. He wrote such awful things about himself, things that just weren’t true, that he clearly thought about himself at the time. He wrote that he did not set out to do such wrongdoings; he wrote about being unable to speak to his GP about his anxiety as he was ashamed, his fear of going to prison, his disgust in himself for getting mixed up in the Loan Charge and his belief that he would now go to hell. [He] finished his pages and pages of his letter with “I can’t say any more. I’m so very scared of what I have to do today but I am at my wits’ end and can’t see any other way”.
This heart-breaking testimony resonates amongst so many of our members who have found themselves in this situation as a result of simply entering into remuneration schemes in good faith, after being told they were tax law complaint and often QC approved.
HMRC have shown no mercy in the tactics they have used against these people. Armed with new and searching powers, they have demanded this tax from people by offering a ‘settlement opportunity’ which includes typically massive and estimated sums, to which interest at 4.25% is added and sometimes penalties as well over a period the victims were unaware they were even in a scheme.
To make matters worse, the Treasury and HMRC have consistently misrepresented the issue in questions answered in Parliament and in the media, portraying the victims in terms laden with behavioural science terms or ‘nudge’ language, designed to make them take action out of feelings of discomfort. Victims have been portrayed as cunning and deceitful people who purposely sought out ‘contrived tax avoidance schemes’ to rob the NHS with their ‘disguised remuneration’ methods of being paid.
I cannot begin to tell you how this alone affects our callers, to be lied about and scapegoated, and accused of cheating.
The fact that Jesse Norman has defended this behaviour, shown no compassion to those affected and is resolutely pressing ahead knowing that large numbers of those affected are suicidal, does not seem to us a congruent or fitting choice as Patron of MIND, when on your website, there is the following mission statement: “We believe no one should have to face a mental health problem alone. We'll listen, give you support and advice, and fight your corner”.
Mr Norman has had many opportunities to ‘listen’ to the Loan Charge victims and ‘provide them support’, however he has instead defended this legislation blindly, stating that (the government) ‘needs the money’, that it only impacts ‘0.6% of the population (incidentally, the same number as those impacted by Covid-19), and called the campaigners who are fighting for their families and futures ‘lobbyists’. Only this month, he sneeringly rebuked David Davis MP in parliament for asking a question about the confirmed Loan Charge suicides.
https://twitter.com/DavidDavisMP/status/1179000188372951041?s=19
People in LCAG who ring our Helpline tell us continually of the sheer frustration and despair at what these aggressive retrospective taxation measures mean for them. Many are being effectively asset-stripped in later life by an HMRC who won’t listen, which does not answer letters on time, which randomly produces and sends different maxed-up figures to which they add tens of thousands of pounds worth of interest. Most of our members do not and have never had the kinds of figures demanded and cannot meet these eye-watering demands, even if they sell everything they have.
The effect on people’s wellbeing, mental capacity and emotional resilience in coping with this onslaught, coupled with the misrepresentation by HMRC and the Treasury, is one of severe never-ending stress and we on the Helpline are acutely aware of the risk of further loss of life through suicide.
We therefore urge you to consider whether Jesse Norman is really fit to be a patron of MIND, considering the mental health crisis that has been triggered by the Loan Charge. By keeping him as patron, MIND is sending out a very clear message which is contrary to your Policy Work. “Our work in Parliament: MPs are there to represent your views. We try to help them understand what it's like to live with a mental health problem, and how they can help make sure everyone who does is treated fairly, positively and with respect”.
We would like to set up a meeting with you to hear from you how you can honestly reconcile this. Perhaps you had no idea of the extent of the misery and suffering caused by this policy? The Government’s own figures are that 104K individuals are affected, but with dependents, we estimate that this figure is substantially more. Most are facing ruinous tax demands, bankruptcy coupled with probably loss of career as they cannot work without security clearance.
On a separate note, we would like to express our admiration for the work of MIND. As volunteers on the LCAG HelpLine, we are so grateful for the incredible work you perform for those suffering with their mental health. We have also often referred callers to you for support, particularly as we agree with you that debt and mental health are very closely linked. Please get in touch to set up a meeting as soon as possible so that we can voice our concerns and hear back from you.
Yours sincerely LCAG HelpLine & Triage Team Volunteers
The Uk scenario raises profound ethical issues for psychologists. As medical practitioners they are bound by the primary rule First Do No Harm.
Can the basic principle of medical ethics be reconciled with nudge conduct which is precisely designed to harm individuals in their pocketbooks – and with the foreseeable consequences?