The not-for-profit Forum has found that small firms pay external contractors £5.8 billion for regulatory compliance services, while internal time costs total £11 billion.

On average each firm hands over £4,900 per year to companies offering legal guidance, including advice on employment, health and safety and tax – more than double the £2,100 average annual bill in 2009.

The Forum's research shows that the combined amount paid each year by small firms to consultants and accountants for tax advice is in excess of £3.3 billion, external health and safety support costs almost £986 million per year and employment law consultancy services come to £752 million.

"Small businesses face a constant struggle to control costs – particularly in the current economic climate – but are being thwarted by the mounting tide of red tape they have to negotiate every day," said the Forum's Chief Executive Phil Orford.

"With just a month to go before October's common commencement date there is no hiding from the fact that red tape compliance costs – including steep consultancy fees – are hindering job creation and, by extension, economic growth.

"Unlike large companies, small firms simply do not have internal resources dedicated to complying with regulations, so either the business owner or a key senior manager is forced to devote a large amount of time to this task – an average of almost 40 hours each month – or they have to pay for an outside consultant, which can be extremely expensive."

Mr Orford added: "Compared to other industries, at present we are seeing a relatively robust services sector, including business services, which suggests that more struggling small firms are seeking out external support. Perhaps some companies providing commercially-driven business services are exploiting this demand by charging high fees. It is always advisable to shop around for a better deal.

"There are also steep legal costs incurred when businesses are charged with breaching regulations. The answer is that prevention is better than cure – it is so important put in place internal processes geared towards complying with the law in the first place."

Tim Leeson, Partner at law firm Crowell & Moring, an international law firm, who offers a wide range of services and has considerable expertise in advising on corporate finance issues associated with funding businesses added that "Many external providers charge on the basis of time spent – e.g. the traditional hourly rate for legal advice. At the SME level, particularly in a downturn, advice charged at an hourly rate is plainly not sustainable. Costs need to be fixed and based on the value of the advice to the SME.

Without the fear of the ticking clock SMEs can engage fully with their lawyers on each issue, at an earlier stage. This will produce better, cheaper solutions for SMEs, rather than asking lawyers to fix things that have gone wrong.

For some time, Crowell & Moring's lawyers have been using pricing structures that are built upon an underlying belief that our success should be determined more by your perceptions of the value we create, and less by the level of time and effort we spend on your projects. We have found that our clients appreciate that we are willing to align our interests with theirs. As a result over 40% per cent of our fee arrangements are now agreed on a similar basis."

There is also evidence that steep employment, health and safety, tax and other consultancy fees are barriers to job creation because they increase as a business grows. In particular, taking on more staff leads to more employment law red tape – and greater compliance costs.

In all, firms with fewer than 10 employees pay an average of £4,346 per year for the services of outside consultants, those with 10-49 staff face average annual bills of £7,277 and firms with over 50 employees pay contractors an average of £10,815 each year.

In addition to its legal expenses insurance, the Forum is helping small businesses negotiate employment law pitfalls via its Employment Guide, which is part of the organisation's Practical Employer package and delivered by its HR Director business support solution. The 2011 guide is to be published in October.

New and updated sections of the Employment Guide include:

- The abolition of the default retirement age and its effect on dismissal and performance monitoring,

- The Bribery Act – including a new bribery policy template

- New agency workers regulations

- Revised section on the Equality Act

- New rates for the National Minimum Wage and other statutory payments.