20/03/2013 07:34 GMT | Updated 19/05/2013 06:12 BST

The Chancellor Must Tax for Growth, Not Populist Appeasement

The economic climate means George Osborne has only limited room for manoeuvre in this year's Budget: generous new incentives and bold reforms are probably out of the question.

He is walking a tightrope in terms of:

• Balancing the interests of small and large businesses alike

• Protecting the interests of British companies whilst still ensuring the UK's international competitiveness

• Focusing on good policymaking in the face of unprecedented political pressure

The Chancellor must tax for growth not populist appeasement.

On the eve of the Budget the populist pressure on the Chancellor to clamp down on tax avoidance has never been higher - whether from a public in revolt over the taxation of multinationals, or a Revenue convinced that increased tax rates or new taxes are the best way to increase the UK's tax take when economic evidence strongly suggests otherwise. There is a danger that in giving way to populist pressure, the Chancellor succeeds only in triggering a dangerous array of unintended consequences.

Public appeasement

The current corporate tax witch-hunt has created a polarised view of companies as either 'good taxpayers' or egregious tax avoiders. Any company which does not fit into the first category is automatically vilified and placed into the second category.

Rolls Royce is the latest example after disclosing it did not pay any corporate tax last year, mainly because its sales were overwhelmingly overseas. Rather than look at the detail or try to understand the situation, critics vilified one of Britain's most successful businesses with hardly a second thought.

Hopefully Rolls Royce will not end up in the same position as Starbucks, which was criticised to such an extent it felt it necessary to volunteer a £20m tax payment over the next two years.

This 'honesty box' approach is no way to operate a tax system, especially when it feels like extortion.

It is important to remember the significant contribution businesses make to the Exchequer. The top 1% of companies contribute broadly 80% of the corporation tax income (in addition to the VAT, PAYE and other taxes they pay) which, as a whole, is broadly equivalent to the combined health, education and police budgets.

Businesses need clear rules on taxation to give them the certainty to engage in long-term financial planning and know that post-tax investment decisions will add shareholder value.

Whilst there have been some positive reforms including the patent box exemption and lowering of corporation tax rates, the poisonous anti-business climate could undermine much of the progress made through tax reform. Recent business surveys give credence to this concern.

Above all, Mr Osborne must resist the temptation to use the Budget unilaterally to try and force multinationals to pay more tax in the UK in an ill-considered way and without consultation. The wheels are already in motion internationally to address contentious issues such as so-called 'profit shifting' and other measures that erode the tax base.

If the UK jumps first it is likely to only succeed in deterring in-bound investment and potentially driving away companies with an existing UK presence - just at a time when the UK corporate tax regime is beginning to regain its competiveness.

Pandering to HMRC

In recent years HMRC has taken it upon itself to expand its remit. It is no longer just collecting taxes, it is re-interpreting the legislation set by Parliament and the intentions of Parliament. As a result, a significant number of legitimate tax arrangements are now being viewed as 'tax dodging' by HMRC, who seem determined to blur the distinction between legal avoidance/tax planning and illegal evasion.

Business leaders faced with this environment and no real champions to stand shoulder to shoulder with them may understandably be wondering if they aren't better off elsewhere - either because of the current direction of travel on tax policy or because of the uncertainties surrounding populism driving tax policy 'made up on the hoof'. This is especially true if their employees face swingeing taxes and a barrage of anti-wealth propaganda.

Tax for growth

Tax can be a powerful weapon to support growth but it can be equally suffocating or drive investment offshore. Rather than focusing myopically on tax rates for individuals and tax payments of multinationals, the Government must learn proven economic lessons and take a dynamic approach to tax in order to raise tax revenues off the back of growth and increased investment. This begins with creating sound policies and providing investment incentives (which HMRC must be prohibited from calling avoidance when used).

If the Chancellor focuses on the building the right environment for business and individuals to encourage investment and job creation; adopts a dynamic approach to tax rather than a revenue-reducing, populist one; takes control of HMRC and the tax legislative process; then a good tax system should follow.