SME-FOCUSED FIRMS: An Introduction to UK-Wide

Pressures and Opportunities in the UK SME Market

According to GOV.UK figures for 2023, SMEs account for 99.9% of the UK’s total number of businesses, employing 16.7 million people (giving a total UK employment share of 61%). An important group indeed. Yet the challenges facing SMEs are legion and it will take highly adept businesses to navigate those challenges in the years ahead.

One of the main concerns for SMEs is the increasing cost of doing business. Increased energy costs, supplier expenses and rising wages have taken a toll, with the number of company insolvencies over the summer higher than those seen during the COVID-19 pandemic and between 2014 and 2019.

There are signs, though, that some of the pressures are starting to ease. The cooling labour market is bringing down wage growth in the private sector and interest rates are expected to fall gradually. The Bank of England anticipates that inflation will rise slightly by the end of the year before dropping in 2025. But while the economy looks set to stabilise on some fronts, uncertainty lies ahead with the Autumn Budget prompting some business owners to accelerate their plans to sell or retire. The government’s proposed changes to employment law are going to result in increased costs for business and possibly a further cooling of the labour market (more on this below).

Against this backdrop there is business to be done and opportunities to get ahead. Some industries are doing better than others. The technology sector, for example, continues to grow. Tech Nation highlights UK tech start-ups raising over GBP16 billion in 2023 and 171 unicorns produced within the sector. With the UK positioned as the third largest AI market in the world behind only the United States and China, there are tremendous opportunities for SMEs to work within or alongside several leading innovation hubs in the UK.

Technology itself is very much an enabler for all businesses. SMEs that are able to take advantage of the tools available to them – not just to improve their own products and services but also to better communicate with their teams and customers – will give themselves more of a chance to thrive. The US Chamber of Commerce has recently published a report finding that small businesses using the most technology are substantially more likely to have grown this past year and that these businesses have a far brighter economic outlook.

Key Legal Developments

Turning to the legal side of things, we have set out below some of the developments and topics that SMEs should watch out for over the next twelve months.

Employment lawyers are going to be busy. The government’s Employment Rights Bill is scheduled to be published this October. Amongst other things, it is expected to ban zero-hour contracts; end “fire and rehire” practices; make parental leave, sick pay and unfair dismissal protection available from day one for all workers; and make flexible working the default position (also from day one). It will take time for all of these measures to be implemented but businesses should get ready as soon as possible. While it will cost SMEs time and money to update their employment documents and prepare for these changes, not doing so will carry a significant risk of claims being brought against them. Another new employment law to be aware of is the Workers Protection (Amendment of Equality Act 2010) Act 2023 (coming into force on 26 October) which will introduce a duty on employers to take reasonable steps to prevent sexual harassment of their employees.

The Digital Markets, Competition and Consumers Act 2024 will be a major shakeup for consumer protection laws and is intended to come into force in stages starting in 2024 or early 2024. For SMEs the most relevant parts of the Act are expected to come into force in April 2025 (protections to prevent fake online reviews and drip pricing) and in Spring 2026 (new rules around subscription contracts, such as those designed to prevent subscription traps). One of the most significant changes is the new powers for the Competition and Markets Authority (CMA) to take enforcement action directly (rather than having to go through the courts). The Act will enable the CMA, in the event of a breach of consumer protection law, to impose a penalty of 10% of the business’s global annual turnover or GBP300,000 (whichever is higher). The CMA will also be able to issue fines of up to 1% of a business’s global annual turnover or GBP30,000 (whichever is higher) for providing materially false or misleading information to the CMA in the course of an investigation or for failing to respond to an information notice.

This may not be a new development, but the risks associated with cybercrime should be a serious concern for many SMEs. The Cyber Security Breaches Survey 2024 published by the UK’s Department for Science, Innovation and Technology found that half of businesses report having experienced some form of cybersecurity breach or attack in the last 12 months. While SMEs should focus on implementing practical measures such as staff training and antivirus software to keep their systems safer, they should also ensure that their operations are underpinned by appropriate and clear policies that their staff understand and follow. SMEs supplying to the public sector should expect to see their clients requiring an increased level of evidence that robust security measures are in place, not just within the SMEs themselves but across their supply chains.

So, looking ahead over the next twelve months, SMEs are going to need their lawyers more than ever. Not just to deal with the kinds of risks that we have highlighted above but because if they want to attract investment or they want to sell, they are going to need to address the changes and get their houses in order to pass the buyer’s or investor’s due diligence.

In turn, law firms acting for SMEs will be working in an environment where their clients face legal challenges of which they are perhaps not even aware and, especially at the smaller end of the group, will not find it easy to pay for. Law firms working for SMEs will need to find ways to keep their rates in check and deliver advice that is quick, commercial and very much solutions-based.