The number of UK businesses in “critical financial distress” has risen by more than a third over the past year, according to insolvency practitioners, as companies contend with a “slew of increased taxes” and the impact of the Middle East conflict.

Hospitality and leisure firms have been faring particularly badly because of shaky consumer confidence, and rising taxes and staff costs, according to research by the restructuring company Begbies Traynor.

It said the number of firms in financial distress had risen by 36.9% in the first three months of this year, compared with the same period in 2025. Its research showed 62,193 companies were affected, up from 45,416 the previous year.

Begbies Traynor, which is one of the UK’s biggest insolvency practitioners, placed some of the blame on the chancellor, Rachel Reeves, for a series of tax rises imposed on businesses over the past year, including increases to employers’ national insurance contributions and the national minimum wage.

Ric Traynor, the company’s executive chair, said these tax rises, combined with increasing energy costs as a result of the Iran war, meant many UK firms were now in a precarious position.

“The truth is that we remain a hostage to macro economic shocks beyond our control, and this combined with one of the most difficult tax and trading environments in recent times means that the situation could get worse very quickly for these vulnerable businesses,” he said.

All 22 sectors of the economy that Begbies Traynor monitors in its quarterly Red Flag Alert report had a rise in the number of companies in financial trouble, but businesses reliant on discretionary spending fared the worst.

The report found hotel and accommodation firms had the highest level of distress, with 69.3% rise in businesses now in a “critical” position. The next highest was leisure and culture firms, with a 65.9% rise, followed by sports and health club businesses, with a 51% increase.

Julie Palmer, the managing partner at Begbies Traynor, said this situation was only likely to grow worse as companies and consumers faced rising inflation after the outbreak of war in the Middle East and the effective closure of the strait of Hormuz.

She said: “Businesses who are reliant on discretionary spending will have been hoping consumer confidence would make a comeback this year, but I fear they will be disappointed. Instead, the threat of rising energy bills, inflation, interest rates and unemployment will see people tightening their belts.”

However, Palmer said some businesses could benefit from an expected boom in Britons opting for UK holidays if jet fuel shortages and potential subsequent flight cancellations put overseas summer getaways under threat.

The Red Flag Alert report has been measuring and reporting corporate financial distress since 2004, and uses a combination of public filings such as county court judgments and company accounts, as well as its own data. It then creates credit risk scoring system that screens companies for marked deterioration in financial indicators such as working capital, retained profits and net worth.

Palmer said Begbies Traynor expected an increasing number of “zombie” businesses fail this year. A “zombie” business is one that just about manages to pay the interest on its debts but cannot afford the resources to invest in growth or bring down its debt.

Traynor added: “The shockwaves from a war in the Middle East will be felt across every corner of the global economy for some time to come.”

A Treasury spokesperson said: “The decisions we made at the budget mean we can stabilise the economy and deliver support for families and businesses, including cutting the cost of living.

“Increasing the national minimum wage boosts pay for over 200,000 young workers, and employer NICs are lower when hiring under‑21s.”