In this current state of ‘austerity’, with a proliferating tax avoidance industry whose reason for existence it is to creatively exploit the ever-complicating fiscal spaghetti of taxing statutes – the new loopholes for avoidance which inevitably arise upon construction of new legislation, Benjamin Franklin would of course be wrong in his conclusion on certainty, that: “In this world, nothing is certain but death and taxes”.

Of the certainty deemed necessary for tax legislation, it is well acknowledged that it necessarily makes revenue collection increasingly uncertain. Contrived avoidance schemes follow in the wake of specifically targeted legislation: tax law followed to the letter. Abuse of Low Value Consignment Relief, an EU tax relief on goods exported from the Channel Islands, for instance, results in a VAT loss of over 110 million pounds per year. We might consider a proverb of Sir Francis Bacon:

“If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties”.

So it is with tax avoidance, estimated to cost 17.5 percent of the total ‘tax gap’ – around 7 billion pounds per year (the figure is disputed as an underestimate).  It was in 1996 when John Avery Jones, the eminent Judge of the Upper Tax Tribunal, argued (pdf) that the result of the unending pursuit of ‘certainty’ in taxing statutes is that “tax legislation is now more than four times as long as it was 25 years ago, but I do not believe it has achieved any more certainty, rather the reverse”. “There is nothing new in complaining about the complexity of tax legislation”, he said: “Every generation does it”.

Indeed, since 1997, Tolley’s Yellow Tax Handbook, the guide to fiscal legislation, has more than doubled in volume, swelling to over 11,000 pages – at the same time, increasing the administrative burden faced by the tax collection bureaucracy.

The efficacy of a statutory General Anti-Avoidance Rule (GAAR), a ‘super law’ to clamp down on avoidance already adopted by a number of common law jurisdictions – Canada, New Zealand, Australia, and others, is now being considered by the newly established Office of Tax Simplification, due to report to the Chancellor. Following the 1998 Budget, the GAAR proposal disappeared, in part for lack of ‘certainty’. It may now be attached to the 2011 Finance Bill, with or without success – and against much inevitable lobbying expenditure from business.

If the principles-based approach of the GAAR is implemented, the relationship between the taxpayer and the state could be reconfigured: the culture of artificiality created by the tax planning industry turned on its head. In its most likely incarnation, tax reliefs and benefits would only be available on those transactions with a genuine commercial, non-tax, purpose. Already, there is a disclosure requirement for tax avoidance schemes of individuals and corporations. Though a GAAR would probably include a facility for taxpayers to request an advance ruling, it would unlikely be compulsory.

According to pre-coalition calculations by Liberal Democrats, the GAAR would be aimed at raising 2.1 billion pounds in corporation tax per year. Deficit reduction might be more adequately handled. Cuts in departmental public spending might not be so deep: 25 percent for the 6 million public-sector workers who will also face a ‘pay freeze’ – a pay cut, if inflation and the regressive VAT rate were taken into account.

If properly crafted (with an adequate clearance mechanism and appeals procedure), the GAAR could give the courts clear constitutional authority to strike down unacceptable tax avoidance schemes – conferring upon judges a necessary interpretative power, beyond mere formalism in statutory interpretation. Such a principles-based tax regime could reconfigure the rules of ‘corporate morality’, and lessen chances for the tax planning industry to exploit imperfections in tax law’s spider web.

It was Ronald Dworkin who provided (pdf) the important distinction between rules and principles: rules are all-or-nothing, but principles may be balanced against each other, and provide guidance on points not expressly covered by rules. Recent UK case law already shows signs of a shift to principles-based reasoning (Gaines-Cooper, earlier this year; Shepherd, in 2005), and tax law has long involved principles that have effects similar to anti-abuse rules: substance-over-form, the step transaction doctrine, the sham transaction doctrine.

In the UK in particular uncertainty would not be problematic: tax avoidance is considered legal, whether successful or not; it does not carry a criminal penalty – the breach not actionable in court. If an avoidance scheme is attempted but fails, the tax must simply be paid with any interest or surcharges.

Of course, Lord Hoffman’s view of the GAAR is that “the cure is worse than the disease”. But like Benjamin Franklin, the view of Lord Hoffman is one from an era by-gone, and highly disputable. Judith Freedman, Oxford’s KPMG Professor of Tax Law, makes a compelling argument (pdf).

The regulation of tax avoidance is unique: here, a genuine rule of law would be constituted by a rule of principles, a system of anti-avoidance constituted by a GAAR, as opposed to a rule of rules – the indeterminacy of rules causes their continuous proliferation. The loopholes created in the legislative framework enable a system of ‘self-regulation’ and distorted transactions governed by the bottom line of the profit-and-loss account.

The introduction of a GAAR could see a gradual development of a new form of certainty through the accretion of a value-based case law: a shift away from narrow legal semanticism. The purpose of the rule could be the guide: principles can be conflictual, and form a superstructure for the interaction of rules. Recent case law of the Canadian Supreme Court has, for instance, developed significant interpretative guidelines for important elements of their GAAR.

While the development of a clearance system would result in an inevitable administrative burden, this burden would be more than offset by the reversal of the absurd game of cat-and-mouse that has long become the situation of tax avoidance.

Old tax certainties are no more. The GAAR has long been waiting in the wings.

Fairness must precede certainty: certainty is not necessarily a prerequisite to fairness. A change in the rules of the game is long overdue: without it, ‘the logic of fiscal austerity’, as Paul Krugman puts it in a recent New York Times op-ed, will continue – perverse and misguided.