Monday 27 February 2017 12:01 am

Alarm bells sound for UK business as rising costs and inflation threaten to squeeze margins

Business groups have renewed calls for government to support companies in the upcoming Budget as firms face a toxic mix of rising inflation, spiralling operating costs and squeezed margins.

Inflation is starting to climb and is forecast to reach nearly three per cent by the end of the year.

Higher input costs are expected to feed through to the fastest pace of price increases for a decade in the UK’s dominant services sector, according to a new quarterly survey by the Confederation of British Industry (CBI). A balance of 42 per cent of businesses surveyed expect prices to rise over the next three months, up from a balance of only 12 per cent the month before, the poll out today shows.

Read more: Sajid Javid signals Budget concession on business rates

Meanwhile, operating costs are set to rise on the back of April's introduction of the national living wage, the new apprenticeship levy and revised business rates that disproportionately affect London-based businesses.

“Retailers are facing a toxic cocktail of rising sourcing costs from past falls in sterling and spiralling operating costs from business rates and increases in the national living wage. We’re only seeing the thin end of the wedge in terms of inflation,” warned Richard Lim, chief executive of Retail Economics.

More than half of small businesses (54 per cent) expect their profits to fall when changes to business rates take effect in April, according to the Federation of Small Businesses (FSB). One in five of those surveyed may even consider closing down or selling their business as a result of the controversial changes.

Read more: Rates row: Government accused of misleading MPs over business rates

The heightened pressures on businesses have led to growing calls for rates reform.

“As a first step towards easing the business rate burden, the chancellor should use next month’s Budget to bring forward the switch from retail price index to consumer price index uprating to 2018/19,” said CBI chief economist Rain Newton-Smith. This would peg business rates to a slower rate of inflation.

“Government should take the opportunity in the upcoming Budget to help businesses, hopefully through a business rate rethink," added Michael Martins, an economist at the Institute of Directors (IoD).

Read more: An overly centralised tax system has exacerbated the business rates debacle

Shadow chancellor John McDonnell has convened an emergency roundtable on business rates in a bid to push for reforms. Today, he will meet groups including the IoD, FSB and the British Chamber of Commerce.

FSB national chairman Mike Cherry said: “Business rates are an outdated tax. FSB is keen for all political parties to help those small firms hardest hit by the current revaluation, and to start to focus on fundamental longer-term reform of business rates to make sure it’s fair for small firms.”

Meanwhile, campaign group The TaxPayers' Alliance advocates automated annual revaluations to avoid so-called “cliff edges” when business rates suddenly jump.