The Federation of Small Businesses is calling for a targeted VAT cut and a National Insurance Contributions (NICs) holiday for small firms as small business confidence fell by 9.6 points in Q3.
The organisation's 'Voice of Small Business' index fell from 0.3 to -9.3 as more businesses lost confidence in the economy.
The news comes just weeks after GDP was revised downwards to 0.1% in the second quarter and new figures showed unemployment reaching 2.57m. According to the index, a balance of 6% more businesses think they will lay people off in the coming three months.
More than three quarters of the firms surveyed said their costs had increased in Q3, mainly due to rising commodity prices; more than half of respondents (57%) cited rising energy costs and 49% blamed a rise in the cost of raw materials.
A NICs holiday would offset this increasing cost pressure on firms, says the FSB. The organisation wants the NICs holiday for start-up firms introduced in September 2010 to be extended to existing UK businesses with fewer than four employees looking to employ up to three more staff.
One in 10 businesses said extending the NICs holiday would be an incentive to take on staff, according to recent FSB research.
Consumer demand is also a large barrier to growth, and so the FSB is also calling for a targeted and time-specific VAT cut to encourage people to spend in certain areas. The organisation is urging the Government to follow the lead of other EU countries and cut VAT in construction and tourism to 5% for a year to help boost the economy.
FSB national chairman John Walker said: "As businesses come to terms with the double whammy of falling revenues and rising costs, it is no wonder that they're losing confidence, and unfortunately, as their overheads increase, one way to control it is to lay off staff. It is the first time since we started the index that we have seen more people believe they're going to lay off staff than take them on.
"Moreover, this is the first time that we have seen confidence in all regions of the UK in negative territory. We urge the Chancellor to look closely at our NICs holiday proposals and bring this forward in his autumn statement. We fear that without it, the recovery will falter once more."