The value of the UK legal services market contracted last year for just the second time since 2005, research has found.

Consultancy IRN Research estimates that the UK market was worth £31.5bn in 2016, a decrease from £32.2bn the previous year.

Forecasts for the coming year predict growth but have been revised downwards from last year mainly due to the uncertainties in the market caused by the impact of Brexit. Revenue is likely to increase by 3% in 2017 followed by 4% growth in 2018.

The UK market is still largely fragmented with the overwhelming majority (85%) of around 12,000 legal practices being classed as small, with four or fewer partners. The top 200 firms accounted for 55% of private practice revenues generated in the UK in 2016, with total revenue for the top 100 passing £20bn for the first time in the financial year 2015/16.

Once the impact of inflation is taken into account, turnover for the whole UK market was down by 5.2%, compared with a 4.7% growth in 2015. The only other year when turnover declined was in 2009 at the height of the global financial crisis.

The research found the hardest hit sector was the bar, with barristers’ revenues declining by 45.5% in 2016, although the scale of this fall was partly due to the sector having an exceptional year in 2015.

Researchers say the prospect of Brexit is making it difficult to be confident about predicting the future growth of the legal services market.

Forecasting 'is very problematic at the moment given the uncertainty regarding the final shape of any trade and business deal between the UK and the EU,’ the report says. With exports of legal services representing over 10% of turnover and with international dispute resolution and mediation also important aspects of the market, the final arrangement will have a major impact.’

The report says a feature of the coming years will be a greater investment in in-house legal teams by companies, with large law firms unbundling their services and taking on more of a contractor role. As happens in the building trade, these large firms will be the lead contractor and will sub-contract work to smaller, more niche, law and other firms.

Law firms will have to be more efficient and more conscious of costs, in turn adopting new IT systems as a way of reducing overheads. There will also be more mergers as firms seek to cut their back office, property and support costs: this is just as likely to involve firms with five partners or more as it will the top end of the market.

The research breaks down forecasts for each sector, rating potential market growth for corporate law as ‘good’ and rating the prospects for commercial and residential property law as ‘moderate to good’. Only the prospects for the personal injury and clinical negligence sectors are rated as ’weak’, with regulatory changes likely to keep the market depressed.

This year’s report includes a survey of 150 legal practitioners working in conveyancing, family law, personal injury and wills.

Overall, six out of 10 respondents have experienced volume and value growth in their practice areas in the past 12 months, although just four out of 10 working in PI reported volume growth. In the next year, 59% expect to witness revenue growth in their practice area but a third expect no growth.