Small enterprise gross sales slowed to two-year low even earlier than the Iran conflict as tax hikes chew

The pressure on small businesses shows no sign of letting up as sales growth slowed to a two-year low even before the Iran war.

Sales across small firms rose by just 2.9 per cent year-on-year in the first quarter, slowing from 5.2 per cent in the final three months of 2025.

The survey of 440,000 small firms by business software firm Xero found that weaker sales were concentrated in the first two months of the year, before the war had begun.

Sales rose by just 1.4 per cent year-on-year in January and 2.4 per cent in February, with some improvement in March as sales growth reached 5 per cent.

It lays bare the crisis already facing small businesses before the Iran war triggered an energy price shock, which will disrupt supply chains and send inflation soaring.

In a separate gloomy report published this week, insolvency expert BTG warned that a growing number of firms are on the brink of collapse because of the war.

Retail and hospitality firms have been hit particularly hard by tax hikes and higher labour costs

Julie Palmer, managing partner at BTG, said: ‘Inevitably we expect to see an increasing number of zombie businesses tipped over the edge this year.’

Small firms have been battered by changes to business rates and higher labour costs, following the increase in employer National Insurance contributions.

Retail and hospitality firms have taken the biggest hit, having recorded growth below the national average in January and February, with sales rising just 0.5 per cent and 1.4 per cent, respectively, according to Xero.

While the data shows some improvement in March, it is unlikely to be sustained through the year. April is likely to see many firms buckle under the strain, as business rate and minimum wage changes come into effect.

And consumers are likely to pull back from discretionary spending by an even greater amount, as the Iran war rocks confidence.

Last week, a poll by market research firm GfK found that households ‘really do have the jitters now’ as price rises bite. Consumer confidence has deteriorated sharply to a score of minus 25.

‘These are challenging months ahead for small businesses,’ said Kate Hayward, UK managing director of Xero. ‘Margins are squeezed by energy and finance costs, and owners are naturally responding with caution.’

It is encouraging more ‘wait and see’ behaviours, where firms delay hiring or expansion and stall investment in new premises or equipment, says Xero. It is also having a knock-on effect on employment, with business owners favouring casual work over permanent hires.

While the number of jobs rose in the first quarter by 2.1 per cent, it remains below the long-term average.

‘The Government must step up and really listen to small businesses who don’t feel heard,’ said Hayward.