Though this and the previous one, the Witness Statement, are difficult most people do not get to this stage if they have used the earlier stages to sort the problem. Suggest you seek help if you are unsure what to do at these final stages.
The Skeleton Argument is the document where you state each legal argument you are going to use.
You can refer to documents in your evidence bundle which should be indexed. This is a draft document which covers lots of different legal arguments so you will need to to look at your own defence / their case and amend it to fit into your circumstances.
It can be sent with your Witness Statement or send it to the court / the other side a few days before. Or you can hand it to the Usher (for the judge) and the other side in the waiting room just prior to going in. It can only cover issues you have mentioned before - or in the other party's pack.
Though it is not necessary in Small Claims cases, it does help your case if you can supply the judge / court with some form of legal reasoning why the claimant's case fails / is unproven.
There are a number of template Skeletons about on the internet so suggest you look at Pepipoo or MoneySavingExpert for examples. But you should only use the parts of these templates that apply to your case. If you do not know what you are doing, then an unstructured Skeletons can do more harm than good.