Higher taxes and fresh tariffs – fuel for corporate insolvencies?

14 May 2025

As the cost of doing business spirals due to higher taxes and fresh tariffs, Jonathan Munnery, a corporate insolvency expert at UK Liquidators, looks at how this fuels insolvency rates…

The cost of operating a business has undoubtedly multiplied this tax year, with fresh US tariffs and higher taxes weighing down on company balance sheets. As a perilous journey lies ahead, UK businesses must remain alert for signs of deteriorating financial health and ward away the rising threat of insolvency.

The Autumn Budget set the tone for a frugal year ahead as the Chancellor put up Employers’ National Insurance Contributions and National Living Wage. With higher labour costs increasing the cost of doing business and customers tightening their wallets due to high inflation, trading conditions remain tough. This has been reflected in the findings of the Red Flag Alert (RFA) report for Q1 2025, which is published by Begbies Traynor Group, and showed critical financial distress levels among UK businesses had increased by 13% compared to Q1 2024.  

With tax rises announced at the Autumn Budget in force from the start of last month, along with Trump’s ‘Liberation Day’ tariffs, the next RFA report will reflect on the impact of these major events. However, what’s crucial to note from the most recent report is the increase in critical financial distress levels compared to this time last year, with more than 5,000 additional companies now affected than in Q1 2024.

Although there has been a slight drop of 3% compared to the figures for last quarter of 2024, it’s clear that there is still a real and serious issue with financial distress amongst UK businesses. Consumer-facing sectors have experienced the greatest increase in ‘critical’ financial distress over the last 12 months, with Bars & Restaurants (+31.2%) and Travel & Tourism (+25.5%) the worst affected.  

With tighter pockets due to the rising cost of living, consumers are reining in non-essential spending which means a slowdown in market activity for the food and hospitality sectors and subsequently more insolvencies. This was also reflected in the most recent Reg Flag Report, with food and hospitality sectors experiencing the greatest increase in ‘significant’ financial distress over the last 12 months. Of these, the worst affected included and Leisure & Cultural Activities (+9.5%).

Business owners across the UK entered Q1 with low optimism and a gloomy outlook, given the tax rises announced at the Autumn Budget and a general slump in confidence towards the UK economy. Now, with more households having reduced pots of disposable income due to high inflation, key consumer-facing sectors are experiencing significantly reduced demand. If this trend continues, businesses already at breaking point will face imminent insolvency, with more companies to undoubtedly follow.

For that reason, seeking insolvency guidance when the first signs a business’s financial health is suffering is critical – and no more so than at a time when UK businesses prepare to absorb tariffs imposed by the US. After a round of successful negotiations with the US, key sectors including automotive, aerospace, and manufacturing, particularly aluminium and steel exporters, have been shielded from Trump’s Liberation Day tariffs. This is good news for some heavyweight industries, but the 10% blanket tariff remains, which ups the financial burden on businesses already weighed down by eye wateringly high overheads. 

The increase in costs will likely trickle down through supply chains as suppliers find ways to shoulder the tax burden. This may push businesses to revise their supply chains and explore alternative markets to keep running costs affordable. While this may be unfeasible for businesses with a substantial stake in US markets, company restructuring must be considered to shed cash from other areas of the business to absorb the new tariffs.

Professional insolvency guidance can provide a lifeline to businesses, small and large, in times of critical financial distress. Firms are now absorbing higher taxes directly or indirectly and expenditure is increasing as a result of the new US tariffs, so the cost of operating a business is spiralling. Corporate restructuring and insolvency options must be considered to haul a business from a precarious position and resolve its financial issues.