High streets buckling under compounding costs, major survey finds, as VAT edges ahead of wages as small businesses' heaviest pressure

Nearly seven in ten small businesses have delayed or cancelled growth plans, and one in five owners say more than a quarter of nearby shops stand empty. 

Rising and compounding costs are forcing Britain's small businesses to shrink rather than grow, according to a major new survey of 526 UK small businesses published today by Enterprise Nation in partnership with Square and EDF Small Business, with hospitality and high street businesses bearing the brunt. 

The research Growth on Hold finds that 69 per cent of small businesses have delayed or cancelled a growth plan in the past year, and half have cut investment. VAT edges ahead of wages as the single heaviest pressure, ranked top by 29 per cent of respondents against 24 per cent for wages, with employer National Insurance, business rates, supply costs and energy compounding the squeeze. 

Six in ten businesses put VAT in their top three pressures, and nearly two-thirds (64 per cent) now see the UK as a harder place to operate than its European peers.  

The pressure is felt the hardest on the high street, where 67 per cent of businesses pay business rates (against just 21 per cent elsewhere), 42 per cent have cut customer-facing staff, and 77 per cent have delayed growth. More than one in five owners (22 per cent) say over a quarter of nearby shopfronts stand empty, and 69 per cent say incentives for landlords to re-let vacant units would make a meaningful difference to their local high street. 

The findings echo the experience of Victoria Cozens, who built Perky Blenders from a one-kilo roaster in her North London garden with her husband Adam into a six-shop independent coffee chain employing 40 people.  

“Two years ago, on paper, we looked like we were on a really good route to franchising and opening more stores. We started that process and then the changes came in: Employers National Insurance (ENI), related wage increases, and more recently the extraordinary increase in business rate costs, especially for hospitality.” 

The cumulative impact has been significant. ENI alone has risen by over £20,000 annually since 2024. “We’ve always tried to pay above the minimum wage for our barista roles. With the increases in costs across the business, especially ENI, it has been hard to support the people we care about the most.” 

 The company employed specialists across marketing, customer service, website management and fulfilment, those roles are now covered by Victoria and the wider team. “You can be an owner-operator and find ways to make it work,” Cozens says. “But if you want to operate multiple sites, grow your business and employ more people, that has become so much more challenging.” 

'The amount we've grown has all gone to paying extra costs' 

The pattern repeats at Broken Eggs, a 30-seat Spanish restaurant in Fitzrovia founded by former City banker Gabriel Larraz, 29. The restaurant employs 14 staff and is, by most measures, thriving: full tables, strong reviews and steady growth. Yet that growth has not translated into profit. 

“When I look at our profit versus last year, the amount of volume that we've grown this year has basically all gone to paying extra costs,” Larraz said.  

“It's not one thing that's changed. It's the national minimum wage, employer contributions, business rates, energy costs. It's a double hit: your direct costs go up, but all of your inputs go up as well because your suppliers are facing the same pressures. 

“The most annoying thing is that it keeps changing all the time. Tell me these are the rules for the next five or ten years and I can plan my business.” 

Businesses call for VAT cut ahead of Budget 

Reducing the standard rate of VAT is the leading policy demand among small businesses, cited by 37 per cent, well ahead of expanded grants (19 per cent), lower business rates (12 per cent) or reduced employer National Insurance (12 per cent). Support is strongest on the high street, where 54 per cent made it their top ask. 

However, the survey suggests a VAT cut would be banked rather than passed on to customers. Asked what they would do with the saving, businesses said they would first use it to absorb other rising costs (46 per cent) and reinvest in the business (44 per cent), well ahead of hiring (29 per cent) or cutting prices (23 per cent). 

“This data shows a small business community that has done everything asked of it and is still being ground down by cost after cost stacking up at once,” said Aaron Asadi, CEO of small business support platform and membership community Enterprise Nation. 

“Businesses aren't asking for a bailout. They're asking for decisions: say at the Budget whether hospitality VAT will be cut, aim the promised rates relief at the smallest premises, and make the support that already exists actually reach businesses. Without that, we will keep seeing owners forced to shrink businesses they've spent a decade building.” 

Louise Miller-Chalk runs luxury homeware brand Miller & Chalk on Towcester high street in Northamptonshire. Running the shop alone while still making products proved unsustainable. To keep things going she decided to do a shop-share with Cécile Harris from gift shop The Slow Life, who moved into Miller & Chalk's second room in July. 

The arrangement has transformed the business model. By splitting rent, business rates and staff wages, Miller-Chalk could finally afford part-time shop assistants. A third small business is moving into another room this month. 

"You can't be a traditional shop anymore," Miller-Chalk said. "You need to think outside the box." 

But just as the shop-share eases immediate pressures, a new challenge looms: the VAT threshold. By year's end, Miller-Chalk expects to cross the £90,000 mark, triggering 20% VAT on everything she sells. 

"As soon as you start to get somewhere, there’s something else you've got to pay for. I've got to get past this VAT threshold as quickly as I can because I'm going to be losing a little bit of profit on each product."  

Energy costs: an under-managed drag on margins 

Energy remains a significant but poorly managed cost. Businesses that could estimate the impact said rising energy bills had cut margins by around 18 per cent on average. Yet three-quarters (75 per cent) are unaware of efficiency grants or reliefs available to them, and 69 per cent did not know the rule of thumb that cutting energy costs by 20 per cent can boost the bottom line as much as a 5 per cent rise in sales. 

Claire Nutt, Director of Small Business at EDF, said: “Independent retailers and small businesses are the engine of our high streets, yet three quarters are unaware of the efficiency support available to them. That's a missed opportunity: even modest changes to lighting, heating and equipment can deliver meaningful savings. We're committed to helping business owners understand their options, from energy audits to available grants, so they can cut costs and protect their margins at a time when every penny counts.” 

Cash flow and payments under pressure 

The survey also finds cash flow confidence is a strong predictor of distress. Businesses not confident about their cash flow are far more likely to have delayed growth (86 per cent, against 50 per cent of confident businesses), cut investment (62 per cent) and even considered closing altogether (48 per cent, against 12 per cent). Card and digital payments dominate, and only 2 per cent of businesses are paid mostly in cash. 

Robert White, Executive Director and Head of Payment Partnerships, Square UK, said: “Many of Britain’s small businesses are not standing still by choice, rising costs on all fronts have stifled the opportunity to grow. The heaviest of those pressures – VAT, National Insurance contributions, business rates – are ones only Government can address. The small businesses on the front foot are those with the clearest sight of their money and quickest access to capital. This is where Square helps, with payments and lending judged on real sales and investment potential. Alongside the policy changes this report recommends, that is how growth on hold starts moving again.” 

The report makes six recommendations to government: 

• Decide on hospitality VAT at the Budget on 28 October, and design any cut around what businesses said they would do with it 
• Raise the Small Business Rate Relief thresholds, and pilot payments to landlords who re-let empty shops 
• Pay the next round of cost support as flat grants through councils 
• Fund enforcement of the late payment law, and name the businesses that break it 
• Back more small business lending through non-bank and community lenders 
• Roll out the West Midlands Business Energy Advice Service across England