Of course you can't sue them!
After just finding out as an adult that they had marital problems and I was often scapegoated. They have admitted to me as an adult that they had to smack me as I was a difficult child and could never sleep, was difficult to feed and comfort.
Sounds like they struggled to parent you and didn't do a very good job.
I have seen them smack my nephew on several occasions
How hard? Hard enough to mark the skin?
and threaten to "Shut you in the shed as you are a naughty boy".
Sounds like the kind of thing parents/grandparents of that generation often said - an empty threat to try to control bad behaviour. Was your nephew traumatised by it, and did you tell your brother/SIL?
My brother has also seen them smack his children in front of him and limited access to the grandchildren.
It's down to him and his DP to deal with this, as it sounds like he's doing.
I am now pretty sure this is how they treated me.
You mean you don't remember them treating you like that?
I have had a lifetime of mental health problems, anxiety, depression etc and have never understood why I cannot cope. Now after reading this information it would explain a lot.
That sounds hard, and I feel for you, but it isn't necessarily due to them having smacked you.
Only the other day I witnessed them smacking my nephew again. Should I report this to the police?
You should report this to your brother and SIL. Did they leave a mark on your nephew when they smacked him? If they didn't, and you're in England, they haven't broken the law.