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The number of UK businesses in “critical financial distress” has jumped by more than a third amid fresh pressure linked to the conflict in the Middle East, according to new research.

Hotels and leisure firms are in particular distress after facing higher labour costs and taxes over the past year, latest research from Begbies Traynor Group (BTG) has shown.

The corporate restructuring specialist’s latest quarterly red flag report indicated that more firms edged closer to collapse in the first quarter of 2026.

It found that the number of companies considered in “critical financial distress” rose by 36.9% to 62,193 for the quarter, compared with the same period a year earlier.

The number of businesses in “significant” financial distress meanwhile rose by 9.6% year on year to 634,867.

Firms have faced pressure from a number of tax increases over the past year, including increases to national insurance contributions.

It also comes amid a backdrop of shaky consumer confidence, particularly affecting sectors reliant on discretionary spending habits.

“These challenges have been exacerbated by energy and materials inflation following the outbreak of war in the Middle East towards the end of the quarter,” BTG said.

The survey found that hotels and accommodation firms had the highest level of distress, with 69.3% of these saying they are in a “critical” position.

Meanwhile, 65.9% of leisure and culture firms and 51% of sports and health club businesses also said they were in critical distress.

Julie Palmer, managing partner at BTG, 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.

“Inevitably we expect to see an increasing number of ‘zombie’ businesses tipped over the edge this year.

“However, we are even starting to see some of the more successful businesses take a more cautious attitude than you might expect as they put cash aside to soak up higher costs and weak demand.”

Ric Traynor, executive chairman of BTG, said: “The shockwaves from a war in the Middle East will be felt across every corner of the global economy for some time to come.

“After initial signs that the UK’s GDP was improving at the very start of the year, it now feels like after taking a step forward, the UK has taken a few steps backwards following one of the most severe energy shocks in living memory.”