SME-Focused Firms: A UK-Wide Overview

UK SMEs: Challenges and Opportunities

SMEs remain the UK’s economic engine room: around 5.5 million of them account for over 99% of all businesses, employ roughly 60% of the private-sector workforce, and generate close to half of private-sector turnover.

When conditions are good for small firms, the whole economy hums; when they are not, growth stalls and local high streets hollow out.

Despite their importance, SMEs are facing a uniquely challenging landscape. Rising taxes, stubborn cost pressures, weak confidence, and new legislative obligations are all weighing on performance.

The economy

Confidence among SMEs has hit record lows. According to a survey published by the Federation of Small Businesses in July 2025, 27% of business owners expect to shrink, close, or exit their firms within a year, while only 25% anticipate growth. This marks the worst outlook since records began.

Unfortunately, we do not expect that sentiment to improve anytime soon. Why?

• Consumer price inflation is proving stubborn. The ONS reported that in August 2025 core CPIH inflation was 4%, with services inflation running hotter than goods.
• While interest rates have started to come down after two years of tight money, lenders have kept commercial borrowing costs elevated.
• While the labour market is cooling after years of acute tightness, wage pressures are very much still in play and productivity gaps remain.
• Non-domestic electricity and gas prices have fallen from crisis highs, but remain above pre-2021 levels. Many small firms are locked into fixed contracts agreed at painful 2022–23 rates.
• Retail, hospitality and leisure relief continues in 2025/26 but at 40% (down from 75% the year before), capped at GBP110,000 per business. For many shops, pubs and venues this reduction in relief is material to margins.
• Since Brexit, UK SMEs have faced significant trade and border friction. Now, the global trading environment is even more challenging, driven by US tariff policies.
• Hiring from overseas has become more difficult. The Skilled Worker route has seen a step change in salary thresholds. From 22 July 2025, the general threshold for new Skilled Worker visas rose to GBP41,700 (up from GBP38,700).

However, despite the challenging times, there are certain sectors of the UK economy that are growing. The professional services sector remains strong and so does the UK’s technology sector (computer programming and consultancy up 4.1% in the second quarter of 2025). AI start-ups raised about GBP1.8 billion in the first half of 2025, a record 30% of all UK venture capital for the period. With the UK positioned as the third-largest AI market in the world behind the USA and China, there are tremendous opportunities for SMEs to work within or alongside several leading innovation hubs in the UK.

Legislative changes

The Economic Crime and Corporate Transparency Act 2023 will affect UK SMEs mainly through tighter compliance and transparency requirements. All companies must verify directors’ identities, maintain accurate registered office and email details, and expect more public disclosure of ownership and financial information. The Act broadens corporate liability via a “senior manager” test, so misconduct by key managers could be attributed to the business. Although the new “failure to prevent fraud” offence targets only large organisations, smaller firms still need robust governance, accurate filings and clear internal policies to mitigate risk and meet Companies House’s strengthened scrutiny and enforcement powers.

The Digital Markets, Competition and Consumers Act 2024 (DMCC) has ushered in the biggest consumer-protection update in a decade:

• The Competition and Markets Authority (CMA) has gained direct administrative enforcement powers with the ability to levy hefty fines.
• Fake reviews are expressly banned for organisations selling to consumers, and platforms/merchants must have credible processes to prevent and remove them.
• Prevention of “drip pricing” (hidden mandatory charges revealed late in checkout) has begun.

Detailed rules on subscriptions are expected to apply from spring 2026. Businesses offering subscriptions will have to provide clear pre-contract information, reminders before renewals or trials ending, and simple cancellation “as easy to exit as to enter.”

The government has signalled a crackdown on late payments to SMEs. Proposals announced on 30 July 2025 would tighten maximum payment terms (with a glidepath from 60 to 45 days), require large companies to disclose payment practices, empower the Small Business Commissioner with stronger enforcement, and escalate penalties for persistent offenders. Legislation is expected to be phased in from 2026.

Changes to employment laws will come into effect so that from April 2026 statutory sick pay will be payable from the first day of absence and employees will be able to take paternity leave from day one of employment as well as other changes. From October 2026 employees will have longer to bring a claim against their employer in the Employment Tribunal (six months rather than three) and “fire and rehire” practice will become much harder.

What can SMEs do to address legal developments and challenges?

Companies House ID verification

SMEs can prepare for Companies House ID verification by:

• • identifying who must verify (all directors and people with significant control (PSCs));
  • deciding whether to use an Authorised Corporate Service Provider (eg, an accountant) or do things themselves via the government route, and collecting identity documents early (especially for overseas directors); and
  • updating onboarding so new directors/PSCs are verified before appointment or within the statutory windows from 18 November 2025.

The DMCC and 2026 subscriptions rules

SMEs can prepare for the DMCC and 2026 subscriptions rules by:

• banning fake reviews; and
• tidying review management (documenting their policy for soliciting, moderating and publishing reviews; training staff; and ensuring platforms/tools meet the new standards).

Note that the CMA now has direct fining powers.

Audit “drip pricing”

SMEs can make any mandatory fees visible up front. If the final checkout price leaps because of admin or booking fees, this puts them in the DMCC danger zone.

Subscription hygiene ahead of 2026

SMEs can map every subscription they offer. They can build pre-renewal reminders, crystal-clear trial terms, and one-click exits.

Employment law changes

SMEs can prepare for these changes by updating leave policies and payroll flows, such as:

• • ensuring that HR/payroll can handle new neonatal leave and pay rules; and
  • reviewing paternity/parental leave templates in anticipation of expanded “day-one” access.

Reviewing flexible working processes

SMEs should expect strengthened day-one rights to request flexible working (beyond the 2024 changes). If they do not already have them, they should prepare a request form and a clear business-grounds template for refusals.

Firing and rehiring

SMEs need to recognise that firing and rehiring is not going to be possible unless the business is in dire financial straits. They therefore need to ensure that their employment contracts have effective variation clauses, and find alternative solutions.

Consider bidding for public sector work

Launched in 2025, the government’s Central Digital Platform has made it easier for SMEs to view and bid for public sector work. Tenderers only need to submit core information about themselves once, which can be reused across bids.

Putting in place internal efficiencies and controls

If sales/delivery operations are slowing down, SMEs can use the time to put in place those internal efficiencies and controls they have been holding off on. They can protect their business from cybercrime by implementing practical measures like staff training and antivirus software to keep systems safer. They can also ensure that operations are underpinned by appropriate and clear policies that staff understand and can follow.

Final thoughts

While the business landscape is undoubtedly challenging for SMEs, these challenges can be turned into opportunities for businesses that are well run and that treat compliance as a strategy.

Looking ahead towards the next twelve months, SMEs are going to need their lawyers more than ever – not just to deal with the kinds of areas 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 a buyer’s or investor’s due diligence.

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