’Permacrisis’ was declared the word of 2022 by Collins Dictionary, defining last year as one marred by ‘an extended period of instability and insecurity, especially one resulting from a series of catastrophic events’. And as we begin a new year, you may well be concerned about what 2023 has in store for SMEs.

Working as part-time General Counsel for a number of businesses, the team of senior lawyers at The Legal Director regularly scan the horizon for the hot topics and key issues for the SMEs they support. Kirstie Penk, Director at The Legal Director gives her summary of some of the key legal developments and trends heading our way in the coming year.

Environmental and Social Governance (ESG)

Currently, there is no legal requirement for SMEs to measure, report on, or reduce emissions. But this does not tell the full story. Aside from the many ethical reasons for prioritising ESG, there is significant risk to SMEs if they chose to ignore it.

Large businesses, with more stringent reporting requirements, are looking down their supply chains and applying increasing pressure on the smaller businesses that they deal with, to tell them their emissions and to evidence their commitment to change. Those SMEs that are ahead of the game in this area will undoubtedly benefit.

And it’s not just your customers who will want to know. Almost all UK lenders have joined the Net Zero Banking Alliance, pledging to reduce carbon emissions in their lending investments portfolio. Best case scenario, you’ll get more intrusive questions about your operations. Worse case, you’ll get less attractive interest rates or no funds at all. And it’s a very similar story with investors and insurers.

Legislation is bound to follow, so you would do well to bump this up your to-do list. Start with carrying out an energy audit. Having the data in front of you will probably highlight some easy wins. And don’t rule out speaking to your competitors. In this area that affects everybody, more businesses are looking to collaborate and share resources.

Retained EU Law (Revocation and Reform) Bill

This Bill affects some 2400 UK regulations across 21 Government departments which implemented EU law. There is a Sunset Date by which time any regulation that hasn’t been amended, repealed or replaced will simply fall away. This is currently 31 December 2023 but is very likely to be pushed back.

The Bill has huge ramifications for SMEs, and, until all the changes have come into force, it is impossible to give definitive advice. I’d recommend keeping an eye on the Government’s REUL dashboard. It’s interactive and updated quarterly and is a good place to explore the current status of EU-derived legislation.

The Employment Bill

Still a work in progress, this Bill is set to be very far reaching and is one to look out for. Acting as a single enforcement agency for employment rights, it is likely to include limitations on NDAs, extended redundancy protections and the right to request a “predictable and stable contract” after 26 weeks.

If you want to get prepared, ask your legal advisor to look at your policies in these areas.

IR35

IR35 has become somewhat of a political football, so you’d be forgiven for losing track of the current situation. September’s infamous mini budget announced that contractors working through personal service companies would now be responsible for deciding whether the IR35 tax rules apply to them.

Jeremy Hunt reversed this decision in October. So, assuming this stays the same, it is still an employer’s responsibility to judge whether IR35 applies.

R&D Tax Credit Regime Changes

The autumn budget contained some unwelcome news for SMEs which will take effect from April. Jeremy Hunt announced a cut to the deduction and credit rates of the flagship R&D Tax Credit scheme, which was originally intended to stimulate growth in the SME market. (The deduction rate will be reduced to 86%, and the credit rate cut to 10%.)

Though assurances have been given that this will have no detrimental effect on the level of R&D investment in the economy, these significant deductions will certainly be felt by R&D-intensive SMEs. It would be worth speaking to a tax advisor if you’re worried about how the changes will hit your business.

Corporation Tax Increases

Equally concerning for the SME market is the increase in Corporation Tax from 19% to 25%, which also comes into force in April. Details on this and the ‘small profits rate’ are available on the government website.

Definition of an SME Changed

A redefinition of the SME threshold from 250 to 500 employees sees many more businesses falling under the SME umbrella. This removes many of the reporting requirements that larger firms are subjected to, which will undoubtedly be received favourably by many businesses.

Cyber threats and Data Protection

Cyber security has doubtless become more of a focus for all businesses in recent years, especially as more companies work on the Cloud and handle valuable personal consumer data. It’s likely this will still be a huge focus in 2023, with potentially some changes on the horizon which will impact SMEs. During the Conservative Party Conference, a plan was announced to replace the UK GDPR with a new “British data protection system”. The idea is this new system should cut red tape for businesses. So, nothing set in stone, but something for SMEs to be aware of as something potentially on the horizon.

Stating the obvious, but the other things to look out for are the impact of energy costs and the importance of retaining your best staff in a volatile job market. For many businesses, managing a hybrid workforce continues to be a focus too and it’s important businesses don’t take their eyes off the ball in the year to come. The Great Resignation continues to have an impact and employees will not be afraid to vote with their feet if they feel a company is not offering them the flexibility they need. 2023 promises to be a busy time for SMEs!

Author: Kirstie Penk, Director at The Legal Director