A new report on business distress in Britain's motor dealerships has shown that one in five of them are unable to pay their short-term debts and liabilities.

The latest Baker Tilly/Company Watch research on motor dealerships has found that many dealerships have remained solvent only due to riding the benefits they have obtained through the scrappage scheme. The figures showed that nearly one in four of the dealerships, with a turnover of between £5 million and £25 million, saw their pre-tax profits fall by 50 per cent or more in the last 12 months.

Head of Motor at Baker Tilly Restructuring and Recovery, Graham Bushby, said that the industry was facing the major challenge of rising costs.

"The pursuit of sales is being hampered by global inflation and margins are being squeezed more so than ever," he said. "There is clear evidence that while the scrappage scheme helped the industry massively in achieving much needed new car sales, it slowed the sales decline rather than prevented it fully."

He added that a "dramatic fall" in sales would be seen in the figures for this year, as buying a new car takes a backseat for consumers, for whom economic and employment uncertainty is leading to depressed consumer confidence.