Peer pressure is one of those horrible terms often associated with smoking, drinking, drug use, and now tax it would seem.
Being encouraged to do something because everyone else around you is doing it too is a calculating method in pressuring people to conform. This tactic is something that behavioural economists, and subsequently HMRC, believe to work when convincing freelancers, contractors and small businesses to cough up and pay their taxes.
Tax evader vs tax avoider
There’s a thin line between a tax evader and a tax avoider. Technically there are differences between the two tax delinquents:
“Looking purely at what you can be jailed for doing, tax evasion is the naughty one. Tax avoidance is the practice of reducing your tax bill through legal, albeit often controversial, methods.”
A tax evader is someone who will use illegal methods to not pay their tax bill, for example not declaring the right amount of tax they owe. An avoider on the other hand can use loopholes to minimise the amount tax they pay, for example some of the celebrities in our Tax Rogues Hall of Shame.
An avoider is also someone who outright ignores their tax bill and takes their time to pay the amount due to HMRC.
What kind of person wouldn’t pay their taxes?
The Government recently published its 2015-16 tax gap report, an analysis of how much tax is overdue in the UK. The current figure stands at a storming £34 billion. Of course the UK Government has warnings, penalties and methods to try and extract the unpaid cash from those who simply won’t cough up.
The vast majority of us don’t have anything to worry about. We pay our income tax and National Insurance contributions through a work-based PAYE scheme, or we diligently fill in and submit our Self Assessment before the January 31st deadline each year, or we pay Corporation Tax to HMRC through our limited company, or sometimes a combination of all three methods – depending on your working practices. Either way, these methods of paying tax are all kosher and above board.
However, for the cluster of those taking their time to pay the tax they owe in Britain, recent research by behavioural economists has suggested there may be ways to persuade people to reach into their pockets.
A study conducted by the University of Chicago, Imperial College in London and HMRC looked at 100,000 people who owed tax in Britain. The sample size was divided into two groups; one was sent a basic letter explaining that they owed tax and the other was sent a letter “designed to tug at the recipient’s’ heart and purse-strings”.
Those who received the latter ‘manipulation’ or ‘peer pressure’ letter were sub-categorised into three groups. One group was told that 90% of Brits paid their taxes on time, the second that their tax money was needed for vital services such as the NHS and the third were handed letters not only stating the percentage of Brits who pay their tax on time, but also informed that they (the recipient) were in a minority group.
Each letter raised payment rates by as much as 2%. However, the letter that told the recipient they were in a minority group proved the most successful and raised the payment rate to over 5%. The study estimates that the sample who received the peer pressure letter duly paid back £15.4 million to HMRC.
Across the pond tax bandits are being caught out using similar methods. Letters trying to claw back overdue tax listed the person’s name, the amount they owed and the “names of other tax delinquents in the area”. The recipient was lead to believe that this information was being shared with their neighbours. When people thought next door’s curtain was twitching and their neighbours knew they hadn’t paid their taxes on time, payment rose by nearly 20%.
The British Psychological Society also highlight a point made in the UK study around the issue of ‘tax morale’.
“It is clearly important that taxpayers feel that the system is fair, trustworthy and just and that money is well spent. Unfortunately not many taxpayers make the connection between the costs of taxation and the benefits of public expenditure. There is evidence that tax attitudes improve when the link to public expenditure is made.”
How can I use this in my business?
Late payments are known to be the bane of many businesses lives, whether you’re a sole trader or limited company. When a client doesn’t cough up the pennies, your cashflow management can spiral out of control.
Of course, we all have our own methods of coping with such poor behaviour from our clients; some send politely worded letters, others move swiftly (and quite rightly) onto issuing penalties for overdue invoices.
If you’re at the letter writing stage of trying to extract cash from clients, there are some key things we can take away from HMRC’s findings.
A clever sentence here and there might help your cause. How about throwing in a statistic on how many of your other clients pay on time? Or a well-worded notification that they are the only client in your roster who has overdue payments? You could even go as far as listing the other clients you work with who’ve paid on time. This might nudge your client into thinking they’re in the minority group and cough up faster.
You could even play the moral card and inform the client how their payment will be spent? It’s probably not a good idea to say their payment will be spent on a new car, but how about feeding yourself or paying the bills? Tug on those heartstrings.
Putting pressure on clients and peers to make a payment is nothing unusual in the world of business and using behavioural economics to could help harpoon those rogue late payers. A new overdue invoice letter with some clever wording is a New Year’s resolution which (if kept) could have those late payments creeping in sooner than expected.