A new wave of ‘zombie’ companies are facing collapse as the financial crisis deepens

Tens of thousands of so-called “zombie” businesses could collapse this year as rising cost pressures and weak demand force companies to break even, tax experts have warned.

New research from Begbies Traynor shows a sharp increase in businesses facing serious financial difficulties, with a 44 percent increase in companies deemed to be in “serious financial difficulty” in the last three months of last year compared to the same period in 2024.

In total, 67,369 companies have been identified as facing severe stress, according to the latest Red Flag report by Begbies. A long-term study analyzes public filings such as district court decisions and company accounts, as well as the results of Begbies’ financial stress, to assess the continuing deterioration of key financial indicators.

The hospitality sector has been among the hardest hit, following a difficult Christmas trading period marked by weak consumer spending. Hotels have seen a 54 percent increase in businesses showing signs of severe distress over the past year, while bars and restaurants have recorded a 39 percent increase.

Begbies said companies across the economy continue to “face a prolonged period of economic uncertainty”, compounded by rising operating costs from higher wages, higher interest rates, increased tax burdens and lower consumer demand.

Julie Palmer, a partner at Begbies Traynor, said the current situation was creating a number of zombie businesses, firms that could pay interest on their debts but could not invest, grow or reduce what they owed meaningfully.

“While many of these organizations have been struggling for years, we’re seeing new momentum in 2026 that could pressure others,” Palmer said. “That’s why HMRC is starting to claim part of the $27 billion in overdue business tax, PAYE and VAT that has accrued during this period of violence.”

He added that unless these businesses are able to secure new investment or be acquired by “faster companies”, many are likely to fail.

Predictions of the demise of zombie companies have been made many times since the 2008 financial crisis, yet a dramatic increase in defaults has never occurred outside of certain categories. In 2025, there were 23,938 registered registered companies, in line with 2024 levels.

However, voluntary sales of creditors, in which shareholders save insolvent companies that can no longer pay their debts, have reached their highest levels since records began in 1960, and the past four years have accounted for the four largest annual rates.

These shutdowns are often used by small businesses and have increased as the cost of voluntary shutdowns has decreased and pandemic relief measures have been withdrawn. Debt experts have expressed concern that the scheme could be misused as a largely overlooked way of escaping debt.

In contrast, corporate authorities, where an insolvent employee takes control in an attempt to rescue the business or achieve a better outcome for creditors, decreased by 6 percent last year compared to 2024. Management is often considered a better measure of broader economic conditions.

Although the delinquency numbers in 2024 and 2025 were similar to those seen during the 2008-09 recession, the overall delinquency rate remains below that number. Analysts note that this is mainly because the UK now has more companies on the register than during the financial crisis.

Begbies warned, however, that the combination of higher taxes, rising employment costs and the gradual withdrawal of pandemic tolerance could still cause delays for thousands of financially fragile firms next year.