Pressures, Opportunities and Legal Developments in the U.K. SME Market

According to GOV.UK figures for 2023, SMEs account for 99.9% of the UK’s total business, 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 higher costs 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. UK GDP from July to September increased by just 0.1%.

The Autumn Budget has added further pressure on many SMEs by increasing the minimum wage, increasing the rate of National Insurance and lowering the earnings threshold at which businesses pay. These measures have been offset somewhat by an increase in the Employment Allowance which will benefit businesses at the smaller end of the SME group with few employees. While the cooling labour market is bringing down wage growth in the private sector, inflation remains above target making it unlikely that we will see interest levels falling anytime soon. 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 startups raising over £16 billion in 2023 and 171 unicorns produced within the sector. With the UK positioned as the third largest AI market in the world behind the US 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 who 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.

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” practice, 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 targeted to commence in stages starting this year or early next. 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 for subscription contracts such as preventing 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 £300,000 (whichever is higher). The CMA will also be able to issue fines of up to 1% of a business’s global annual turnover or £30,000 (whichever is higher) for providing materially false or misleading information to the CMA in the course of an investigation or failing to respond to an information notice. 

Nothing new but the risks associated with cybercrime should be a serious concern for manySMEs. 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 cyber security breach or attack in the last 12 months. While SMEs should focus on implementing practical measures like 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 chain.

So, looking ahead for 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 are facing legal challenges which they perhaps aren’t aware of and, especially at the smaller end of the group, won’t 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 muchsolutions based.

(Note: this article first appeared in Chambers and Partners on 17 October 2024 and has been slightly modified)