The Hart of the tax avoidance issue: ‘Core and Penumbra’ revisited

In recent days, I’ve been reading back over my Jurisprudence notes in order to understand the place of law in achieving administrative justice-does the answer lie in structuring rules, or in providing discretion, or finding a balance between law, rules and discretion, or deciphering principles and so on. All of these propositions, when stripped, retreat to the same central question: what is law?

At which point, one is reminded of Hart’s famous metaphor that law has both a core and a penumbra. At the core, the fact scenarios which come within the scope of the law are clear. As one moves towards the penumbra however, the answer as to whether a fact pattern will fall within its scope becomes unclear. Famously, Hart used the example of a law which prescribed that there be ‘no vehicles in the park’ to explain this phenomenon. Undoubtedly, this would mean that a fully functional car would not be permitted in the park. However, would it cover the case of a skateboard? A defunct, stationary military exhibition tank? The idea is that fact scenarios, which the legislature will not have foreseen, will inevitably arise at the penumbra.

Tax law accordingly should be no different. Whilst the taxing provision should be clear at its core, it inevitably becomes unclear at its penumbra. The problem with tax law and tax avoidance however is that this inevitability of ambiguity has a cost, and more importantly, provides an active monetary incentive for those who wish to reduce their tax bill. Fact scenarios, rather than benevolently or inevitably arising in the penumbra, are manufactured so as to achieve an advantage which the legislature will not have foreseen.

This is one of the central legal difficulties of tax avoidance-not that ambiguity will exist in the law, but that individuals or companies are incentivized to place themselves in the penumbra.


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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13 Responses to The Hart of the tax avoidance issue: ‘Core and Penumbra’ revisited

  1. The equal and opposite problem is that when you try to place yourself in the core of one law, you might find yourself in the penumbra of another. These things are not discrete.


  2. Hi Andrew,

    Indeed, the ‘Core/Penumbra’ metaphor, like almost everything those philosophers have come up with, covers some aspects but not all! In this piece, I was just trying to convey a problem that arises at first principles-that’s why I chose to use the word “should” a few times (and have come back after lunch to temper some of the language!)

    In practice however, there are many different variables. For instance, some laws have no core, even on their face. There is an assumption in the metaphor that we can always extract the intention of parliament from the words of a statute-but that is a generalisation in the case of tax.



    • The metaphor does sound rather like prototype theory, that I came across when studying linguistics and philosophy of language. Essentially, there is a thing that is the prototype (or perhaps archetype) of the meaning of a word, but there are other things that resemble it to a greater or lesser degree.

      So a sparrow might be pretty close to the prototype of a “bird”, an ostrich rather further away but still close enough to be a bird, Big Bird from Sesame Street rather further away and perhaps only just in there, and a dinosaur also quite far away in a different direction (and far enough for “bird” not to be an appropriate term in most situations).

      The key thing in language is that people have different prototypes: I may think a sparrow is a birdy as you can get, but you may think of a blackbird and someone else may think of an eagle. Or indeed an ostrich. It depends on the qualities you associate with the word, and the weight you put on them.

      Coming back to tax law, you can then find that what someone regards as squarely in the core of a given law is regarded by other people as being quite far out in the penumbra, because they see the core as being in a different place. The same person might even put the core in different places, depending on whether they’re following the exact wording of the statute, the intention of Parliament (as determined otherwise than from statute), or some other principle such as morality or common sense.

      Liked by 2 people

  3. This is not restricted to tax though.

    At the moment I have an issue with a provision of the Companies Acts on one client which our solicitor is trying to find some kind of “solution” for.

    I have another client entering liquidation where the liquidator is trying to find an analysis to preserve cash to fund legal action to recover more cash.

    The Irish banks may have taken a very aggressive interpretation of their regulatory obligations, while it appears that their auditors may have taken a more “benign” view on theirs.

    Professionals find “interpretations” of all manner of areas of the law to best serve their client. It is what we do so why should the tax profession be singled out in this regard?

    I appreciate that tax avoidance is where the debate is at the moment, and I agree that we do operate in the penumbra rather than at the core. But we’re not unique in this regard.


    • I think we operate in the penumbra because in many cases the core is actually a point, not an area, so all you can do is work out how close you are to it – or perhaps which point you’re closest to. Situations where you can be confident you’ve hit the nail on the head are… well, not uncommon, but they are very simple and uncontroversial. ISAs, pensions, that sort of thing.

      For example, I’ve been looking at deferred consideration recently, and whether it’s ascertainable or not. I can find a lot of descriptions of consideration which is clearly ascertainable-but-contingent, and I can find lots of descriptions of unascertainable consideration, but my cases are different from both those prototype points. The question then is which one they’re closer to.

      Another factor is that not only are there are differing interpretations of where the central point is, there can be differing interpretations of where you are. So you might think that you’re reasonably close to the core of the law because it’s at (x,y) and you’re at point (x+1,y) – so the distance from core is a reasonable 1 – but then someone else might say the core is at (x-2,y-2) and you’re at (x+2, y+1) so your distance from the core is an unacceptable 5.


      • I take your point entirely around areas where the law is just unclear.

        But I was thinking more about e.g. acquisition structuring which could be open the the charge of treaty shopping.

        So, if a client with nothing in Luxembourg structures a transaction via a Luxembourg Newco to avail of a particular treaty provision they will carry significant risk around maintaining POEM, an Indofood challenge (ignoring Sainsbury v O’Connor) etc.

        If the group have an active entity in say the Netherlands and the Dutch treaty is similar to the Luxembourg treaty, and you structure the investment via that entity then your implementation risk reduces, but not to zero, since the Dutch Opco is, somewhat artificially, the acquiring party which may have no experience of e.g. the British market and thus management from the parent jurisdiction may end up making decisions.

        But in both instances you are structuring the transaction to avail of a provision of a law to mitigate tax. In the latter example the risk is reduced, but one can see the argument that both structures could be perceived as abusive since your starting point was how should I structure this acquisition to mitigate withholding tax leakage at an acceptable level of risk.

        Even when we’re advising on a completely commercial transaction that is usually what we are paid for and so that is our starting point. So to my mind we advise in the penumbra because if there wasn’t a penumbra there wouldn’t really be much need for us as a profession outside compliance.


      • I agree with you about “if there wasn’t a penumbra there wouldn’t really be much need for us as a profession outside compliance”. The urge to lock down what people can do is quite a strong one in human nature.

        I think there are two slightly different ways of looking at the penumbra here. The original one in Steve’s post is essentially to say that there are certain fact patterns that to which a certain law applies, plus a penumbra of fact patterns to which it may or may not apply. On this model, we operate in the penumbra in order to claim the legal effects of the law without the economic fact pattern being entirely correct.

        The point theory is to say that there is a Prototype, or Platonic form, of a fact pattern to which a certain law applies, but being a Platonic form you’ll never actually find such a simple clear-cut pattern (at least, not outside a textbook or exam paper) so all real-world fact-patterns will fall somewhere in the penumbra. On this model, we operate in the penumbra because there is nowhere else to operate.

        With your Netherlands/Luxembourg example, I think the Core model would say that the acquiring company is operating in the penumbra because the Core’s fact pattern is that a company in country A acquires a company in country B, so by choosing to introduce Newco in country C or D to make the investment, it has stepped outside that Core.

        The Point model would say that the prototype of an international acquisition is that a company in country A acquires a company in country B, but in practice with an international group there are always going to be more than just those two companies involved. So even if you just have a couple of subs in country A and maybe one in country E you’re already slightly off the prototype and into the penumbra. The question then is, are we unacceptably far away from the point, or are we reasonably close? This then leads to the question of how close is reasonable, and one answer may be that to deliberately introduce a step which moves you away from the prototype is somewhat unreasonable. If you have companies in countries A, B and C, then incorporating a Newco in D is likely to take you further from the prototype. But even the choice to use A rather than B or C is a decision which moves you around in the penumbra slightly.

        An interesting facet of this sort of thinking is that it allows for the “everybody else does it” argument. If lots of people use a Luxembourg acquisition vehicles, then arguably that becomes a prototype in its own right… though what the tax effect of using it should be is of course an entirely different question.

        Liked by 2 people

  4. Hi Aisling,

    Thank you. Undoubtedly one is going to find that tax is not the only example of law which has a penumbra that can be used to an individual’s advantage. Indeed, much of the stuff I’m reading these days to do with regulation focuses on the fact that the particular regulation which is used will not in itself serve to increase compliance (with whatever the object of the regulation is). Rather, greater forces such as culture etc make a much greater difference.



  5. Steve,

    My point is that it is not that it is one of a few, it is one of many so I don’t think it can be treated differently.

    It is not clear if MOP actually advised that Anglo could make the loans to the Maples ten under the commercial transaction exemption to s60. If they did, the conviction means that advice was incorrect, but the sentencing reflects the point that the Anglo board thought they had that advice which may or may not have been wishful thinking.

    Every legal battle involves two parties trying to enforce a different interpretation of the law and is likely in some kind of penumbra, every single one.

    So why should tax law be viewed differently to any other law other than the fact that the cost falls on the state, but the cost of incorrect legal advice (if that is what occurred) to a bank could also fall on the State?

    Best regards,


    Liked by 1 person

  6. Pingback: Legal philosophy and a “voluntary” obligation to pay taxes | taxatlincolnox

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