The global financial crisis led to stimulus packages across the world, designed to support consumer spending and to reduce the immediate cash costs to business. Here, in the UK, we saw the reduction in VAT to 15 per cent, more generous allowances for capital expenditure and deferral of tax liabilities, among others. Without a doubt, the tax system has played a vital part in providing the support needed to weather the economic storm.

The situation is now changing, with tax-raising measures, such as the new 50 per cent rate of income tax, drawing near and many of the stimulus reliefs and incentives ending. With the economy in a delicate shape these measures, combined with a programme for spending restraint and some optimistic growth forecasts, are expected to provide only a fraction of the extra income needed to close the Government deficit.

So, what are the factors the Chancellor should consider in making his decisions for the forthcoming Pre-Budget Report (PBR) and what options should be top of the list?

The options of governments are made more complex by the increasing connectivity and interdependence of the world’s markets and businesses. Over the last decade, large companies have shifted from managing discrete hubs in locations around the world to becoming true global companies. These companies see the world as one connected market, more focused on the business drivers of their competitiveness rather than the geographical nature of the markets.

As a result, policymakers need to consider their tax systems in a far more holistic way, taking note of the impact that small changes in approach can have on these far more mobile factors of production.

This competitive environment is one in which the UK has historically thrived but some elements of recent experience is calling that into question. Once the 50 per cent rate comes into effect in 2010-11, the UK will have the joint seventh highest marginal income tax rate of the Organisation for Economic Co-operation and Development (OECD) countries. Such high-income tax rates (with few deductions against income) and the rules on the taxation of non-domicillaries may affect the UK’s position as an attractive location for the entrepreneurs and mobile executives that have been the drivers of much of our economy.

Similar concerns exist on capital investment. For some time, the UK has prided itself in being the largest recipient of foreign direct investment (FDI) in Europe, a sure sign of the attractiveness of our economy. However, figures released by the United Nations Conference on Trade and Development (Unctad) in September 2009 showed that the UK has slipped to second in Europe in terms of inflows of FDI, behind France; and from second to fourth in the world. The World Investment Report 2009 reports that the leading destinations for FDI in 2008 were the US, France, China, and the UK.

In framing his tax policies for the PBR, the Chancellor needs to think about how the tax system can continue to support the business environment. Helping businesses in this way need not be costly but should provide a framework to give certainty and clarity both in the short term and beyond.

UK businesses are well placed to prosper from a global recovery but they need a regime that allows them the flexibility to take commercial decisions without being hampered by the tax system’s complexities. They need certainty that the fundamentals of the tax system in place when decisions are made will be in place in the medium and long-term too.

This certainty applies particularly in relation to the tax base. It is, therefore, time to push forward with ongoing reforms. This includes focusing the UK tax regime on UK, rather than overseas, profits and the development of a positive regime for the taxation of intellectual property. Such actions would end a prolonged period of uncertainty and help the UK compete.

In order to capture the opportunities for a future recovery, UK businesses will need to gain, retain and deploy management teams that are capable of addressing the complex market and organisational environment. At a time when key individuals see global mobility as an increasingly viable option, the level of employment taxes in the UK will be a major factor in the decision of whether to stay or relocate.

By demonstrating a clear sense of direction for the tax regime and certainty as to its potential impact, the UK will be a more attractive location for businesses trying to boost their global market reach and product/service mix to exploit opportunities, achieve optimum returns and mitigate risk. Such an approach will help businesses make and execute decisions quickly to take advantage of shorter windows of opportunity and to respond more quickly to adverse developments.

This is a chance to make the UK “fit for business”. It is crucial that, in emerging from the downturn, certainty is not the next casualty. The Chancellor should not undermine the strengths of the UK; if he does, recovery, when it comes, may go elsewhere.

• Chris Sanger is Ernst & Young’s head of tax policy and a former adviser to Gordon Brown

Times Recommends

• Toyota recalls 437,000 cars including Lexus
• Myners says bonuses are bleeding pension funds
• Japanese company faked safety reports on seats