Making tax easy

Errors cause the largest proportion of the UK tax gap. However, most tax compliance experiments test the impact of punishment, using student samples who participate in economic games. We conducted an incentive-compatible experiment, using a simulated online tax form and a sample of taxpayers, to test the impact of prompts on the tax declarations, in the context of Private Residence Relief (PRR) on Capital Gains Tax (CGT) when selling a second property, which is a form where people often make errors. A sample of n = 969 UK homeowners completed a simulated CGT form, using information from a vignette about the sale of a property. We randomly assigned participants to three groups: Control (no prompt), Error prompt (highlighting the risk of errors), and Audit prompt (highlighting the risk of audit by checking claims against third-party data). The primary outcome was net declared tax liability; this was higher in Error prompt compared to Control, and was driven by differences in the percentage of participants declaring no tax (22% vs 34%). There were no differences from Audit prompt (29%). The Error prompt group were more likely to declare some PRR compared to Control (56% vs 46%), there were no differences in Audit prompt (52%). Neither prompt improved accuracy: given that people engaged, their PRR declarations did not differ. However, the prompts doubled the proportion of participants who checked the information about how to calculate PRR again (7% in Control vs 15% and 14% in Error and Audit prompts). This suggests that prompts can lead taxpayers to engage more with their declarations.