HMRC has been sending ‘nudge’ letters directly to individuals involved in tax disputes. The letters are a sign that the department’s enthusiasm for behavioural psychology tactics is reaching into dispute resolution.
The city law firm RPC, however, labelled the letters a backhanded move designed to circumvent the judicial process. The tactic originated from the government’s behavioural insights team, the so called “nudge unit” that was established in 2010.
Drawing its inspiration from the data-driven behavioural economics popularised by ‘Freakonomics’ authors Stephen J Dubner and Steven Levitt, the initiative sought to use similar techniques to influence taxpayer behaviour.
The 11-strong nudge unit’s boss is David Halpern, an Oxbridge educated behavioural psychologist. The unit was partially in 2013 and now offers its services to other bodies, including the New South Wales government in Australia.
Halpern’s theory is that human behaviour can be influenced by many things, such as a desire to conform, shame, vanity and gentle prompting or “nudging”. RPC contends, however, that sending nudge letters in the context of a legal dispute would be seen as applying undue pressure.
The law firm said the use of nudge letters by HMRC, which many taxpayers find intimidating, is common-place.
“HMRC believe that by placing pressure directly on taxpayers engaged in a dispute they can force them to pull out and settle,” said Adam Craggs, partner and head of RPC’s tax disputes team. “They are sending letters about often highly complex issues to individuals who do not have technical knowledge of tax issues.”
In a statement to AccountingWEB, HMRC denied RPC’s accusation. “We have found that those involved in tax avoidance will sometimes not have been fully informed regarding the risks inherent in these arrangements,” the department said.
“In such circumstances, it can be productive to write directly to the taxpayer, to ensure that they are aware of all the options open to them. We never apply pressure and always suggest that a taxpayer should discuss the issues raised with their professional adviser.”
Craggs isn't convinced. “That’s quite a lot of nonsense,” he said. “The situation we’re talking about is one where there’s a dispute that’s heading to tribunal. To suggest that they don’t know what the consequences are is disingenuous from HMRC, to be honest.”
Under solicitor regulation authority rules, HMRC’s lawyers aren’t allowed to contact individuals directly. But there’s a loophole when it comes to nudge letters that come from a separate organisation.
“We can only politely write to them and ask them to stop,” said Craggs. “But we’ve been told in no uncertain terms that the Revenue feels these letters have a good effect.”
According to RPC some individuals have received more than one letter.
The letters tend to include the same information: they studiously mention HMRC’s 80% success rate at tribunal, allude to potential bad publicity stemming from a negative tribunal decision and remind the reader that HMRC is ready to help if the taxpayer wishes to resolve the dispute.
“It’s slightly Orwellian and a little bit sinister,” said Craggs. “It’s clear that large sums have been paid to behavioural psychologists and that they’re happy with the result.”
Have you seen any of these nudge letters? What’s your take?