AI and the Law in 2026: How UK SMEs Can Innovate Without Legal Risk

In 2026, AI is no longer a “future tech” conversation - it’s a daily tool for almost every UK SME. Whether your team is using ChatGPT to draft emails, Midjourney to create social media assets, or AI-powered chatbots to triage customer queries, many businesses are now, in practice, AI-enabled.

But here’s the legal reality: the law hasn’t fully caught up with the technology. For small and medium-sized businesses, this creates something of a legal “Wild West” - from over-reliance on hallucinated outputs to accidentally exposing confidential data or weakening your IP position.

The good news? With the right guardrails, you can embrace AI confidently and legally.

With the right guardrails, you can embrace AI confidently and legally

The “Who Owns It?” Question: Understanding the IP Risk When Using AI

A common misconception is that if you prompt an AI to create something, you automatically and fully own the result. The position under the law in England & Wales is more nuanced. Under the Copyright, Designs and Patents Act 1988, copyright usually protects works created by a human author.

The law in England & Wales does recognise copyright in certain “computer-generated works”, but the protection is narrower, less tested, and potentially easier to challenge (particularly where human involvement is minimal). This means that while your business may have rights in AI-generated outputs, those rights may:

• Be harder to enforce

• Offer weaker protection against competitors

• Be less suitable for high-value brand assets such as logos or core product code

  
  

For example, if a logo, blog post, or piece of code is generated with little or no human creative input, a competitor may find it easier to replicate it without clear legal consequences.

👉 If you’re unsure whether your business actually owns the content your team is generating with AI, this is often the first issue we address when helping SMEs put an AI usage policy in place.

Actionable guidance

Adopt a “Human-in-the-Loop” approach: AI should be a starting point, not the final author. Ensure staff meaningfully edit, refine, curate, or arrange AI outputs so that human creativity is clearly involved.

Keep an audit trail: Retain drafts, comments, and versions that show how human input shaped the final work. This can be valuable evidence if ownership is ever challenged.

Check your AI vendor’s terms: Not all tools treat ownership equally. Enterprise or business versions of AI tools are more likely to:

• Confirm that you retain rights in inputs and outputs

• Restrict the provider’s ability to reuse your data

  
  

Free tools may grant the provider broad licences over what you upload.

Data Protection: Don’t Feed the AI Machine Your Secrets

Pasting a client contract into a public AI tool to “summarise the key risks” might feel efficient, but it can create serious data protection issues. Under UK GDPR, uploading personal data to an AI provider may amount to an unlawful disclosure unless appropriate safeguards are in place, including proper contractual arrangements and controls on how the data is used.

👉 For most SMEs, addressing these risks doesn’t require stopping AI use or buying new software; it usually means setting clear rules around how existing tools are used.

Actionable guidance

Anonymise before you paste: Remove names, addresses, financial figures, and commercially sensitive details. Replace them with placeholders such as “Client A” or “[Amount]”.

Use tools with data controls: Where possible, use AI platforms that:

• Do not train models on your inputs

• Offer UK/EU data residency options

• Provide a clear data processing agreement (DPA)

  
  

Disable training where available: Many AI tools allow you to opt out of your data being used for model training. This should be the default for any business use.

AI “Hallucinations”: The Liability Still Sits With You

If your AI chatbot provides incorrect pricing, misleading product information, or an invented refund policy, the legal consequences do not disappear because “the AI said it”. Under consumer and contract law in England & Wales, businesses remain responsible for:

• The accuracy of information they provide

• Statements that influence purchasing decisions

• Commitments made to customers, whether by a human or a system

  
  

Disclaimers can help manage expectations, but they do not override consumer protection law.

Actionable guidance

Add clear context notices: For example: “This is an AI-assisted tool. Please verify all pricing, contractual, or financial information with a member of our team.”

Audit regularly: AI tools should be tested and reviewed on an ongoing basis. Check for inaccuracies, bias, or outdated information (particularly where customers rely on the outputs).

Three Practical Steps to “AI-Proof” Your Business

If your business doesn’t have an AI usage policy, it is effectively operating without guardrails. This doesn’t need to be complex; clarity matters more than length.

1. Create a “Permitted Tools” list

Do not allow staff to use any AI tool they find online. Vet a small number of approved tools (for example, Microsoft Copilot or a secure enterprise AI platform), confirm their security credentials (such as ISO 27001 or Cyber Essentials Plus), and mandate that only these tools may be used for work purposes.

2. Implement a human sign-off process

Any AI-assisted output that leaves the business (such as proposals, marketing materials, client communications and invoices) should be reviewed and approved by a human. This creates accountability and reduces risk.

3. Update contracts and policies

Employment contracts and staff handbooks should make clear that:

• AI may only be used in line with the company’s AI usage policy

• Work created using AI as a tool belongs to the business

• Personal data and other confidential information must never be input into unauthorised systems

  
  

Looking Ahead: What’s Coming Next?

The UK has not yet adopted a single, comprehensive AI Act like the EU, but the direction of travel is clear. Regulators are increasingly focused on high-risk AI uses, such as recruitment, credit checks, and decision-making that affects individuals’ rights. More formal regulation is expected to develop over the next one to two years. Businesses that put sensible governance in place now will be far better positioned when new rules do arrive.

Is Your Business AI-Legal?

Most SMEs are already using AI but the real risk is doing so without clear rules. We help UK SMEs put in place practical, proportionate AI usage policies that:

• Protect IP created using AI

• Reduce GDPR and confidentiality risk

• Keep teams productive rather than restricted

  
  

In most cases, an AI usage policy can be implemented within 1–2 weeks, with minimal disruption to how your team works day to day.

Get in touch to discuss whether your current AI use needs formal guardrails.