Nearly 50,000 UK companies are on the brink of collapse, with retailers and hospitality firms among the hardest hit, as rising wage costs due to Rachel Reeves’ budget measures put small firms under “immense strain”, according to a report.The latest Begbies Traynor red flag alert found that firms in critical financial distress rose by more than a fifth – 21.4% – year-on-year to 49,309 in the second quarter.
Consumer-facing industries saw some of the most “extreme” rises in critical financial distress, with a 41.7% surge among bars and restaurants, a 39% leap for travel and tourism and 17.8% jump for general retailers. Begbies warned that many independent pubs will not have the scale to withstand the pressures for another year without action.
Ric Traynor, executive chairman of Begbies Traynor, said: “The sharp rise in critical distress underscores just how tough the economic environment is for UK businesses and it’s abundantly clear that tens of thousands of firms are struggling to stay afloat.
“Small and medium-sized businesses across the UK are being put under immense strain by the recent increases to employers’ NI as well as the increase to the national minimum wage.
“With limited financial headroom to absorb rising costs, many businesses are now reaching a tipping point.”
It is the latest sign of the toll taken on many firms by the Government’s move in last autumn’s budget to increase national insurance contributions (NICs) and hike the minimum wage, both of which take effect in April.
Labour-intensive companies in particular have felt the impact, such as retailers and restaurants, and bars.
Troubles in the sector have been compounded by a pullback in consumer spending, according to Begbies.
Julie Palmer, a partner at Begbies Traynor, said: “Households are still grappling with their finances, and this is keeping consumer confidence volatile.
“The knock-on effect of this is clear to see in the consumer-facing sectors where margins are thin, growth is hard to come by, and the impact of higher employee costs is pushing many businesses to the brink of collapse.
“So, it is of no surprise to me that while larger pub groups might be performing well, by squeezing out extra efficiencies to counteract onerous price rises, many independent players won’t have the scale to withstand the pressures of this environment for another 12 months if nothing improves.”
The British Beer and Pub Association (BBPA) recently estimated that 378 pubs will close this year across England, Wales, and Scotland, which would amount to more than 5,600 direct job losses.
The wider economy is also showing signs of strain, with recent official figures revealing that gross domestic product shrank by 0.1% in May, following a 0.3% drop in April.
“With no end in sight to the current economic malaise, I fear the financial burdens companies are enduring at present are simply too high for many not to avoid collapse,” said Ms Palmer.