Small businesses ended 2010 less confident than they were at the beginning of the year, according to the Federation of Small Businesses' (FSB) latest Voice of Small Business Index.

The report, which looks at the general health of the small business sector, has found in the fourth quarter of 2010 that business confidence fell for the third successive quarter to a net score of -13.2, the deepest decline since the survey began in March 2010.

Overall, the figures show that the private sector recovery lost momentum in 2010, and as the constraints on businesses cashflow increased from utility bills, fuel duty and VAT combined with the public sector cuts, growth in 2011 is also likely to be sluggish at best.

The severe weather at the end of the year and the rise in VAT to 20% at the start of 2011 have both had an impact of small firms' confidence, especially those businesses operating in service and consumer focused sectors such as restaurants, hospitality and retail sectors and those in the transport sector.

The report also shows that small businesses expect employment growth to weaken in the coming months, with 77.7% of small firms expecting to keep employment levels the same, but 12.4% expecting to decrease the number of staff they have – up from 10.4% in quarter three.

The FSB is urging the government to bring forward plans for growth that includes a competitive tax system to help boost employment and to keep to its manifesto pledge to introduce a fuel duty stabiliser. The Bank of England must also keep the base interest rate at 0.5% to help keep the focus on growth.

John Walker, national chairman, Federation of Small Businesses, said: "A number of pressures on small businesses are beginning to come to a head, such as the increase in VAT and fuel duty, placing more strain on cashflow. This combined with the severe weather at the end of 2010 has meant that small firms are not as confident about their prospects in 2011.

"With inflation above target and the labour market still weak, small firms cannot rely solely on the consumer for growth in 2011. So it is imperative that the Bank of England base rate is kept at 0.5%, as once the impact of the VAT rise is excluded, inflation is relatively low."