A guide to business rates

When starting to look for business premises, location and rent are the 2 obvious criteria. It is very important though not to forget to take into account business rates, this notorious tax on commercial properties, which can quickly raise your overheads and jeopardize your company’s financial balance.

What are business rates?

Business rates are a property tax paid by the occupants of the premises from which they run their business (or the landlord if the premises in question are empty). This tax is levied by the local council and is used to finance public services.

It is important to note that, as it is not part of the landlord/tenant commercial relationship, it is therefore not negotiable.

This tax is not subject to VAT and is generally levied monthly. The tenant is responsible for it from the moment the lease is signed, regardless of whether or not they occupy the premises or not.

How are business rates calculated?

The calculation of business rates is rather complex and is based on the notion of rateable value.

Every business property has a rateable value calculated by the government agency, the VOA (Valuation Office Agency). It is based on 2 criteria: the size and the commercial value of the geographical area.

The size first. Each property is divided into zones A, B and C. Each zone has a depth of 6.1m, zone A being the closest to the storefront. Then comes zone B (6.1m deep as well) then zone C. Each zone has a different value, zone B being worth half the value of zone A and so on. Upper floors and basements will have a lesser value. Clearly, for the same surface area, premises will have a higher rateable value if they have a large storefront compared to those with a smaller storefront but more depth.

For more information, watch this video.

Then there is the valuation of the geographic location. Two premises of identical configuration will not have the same rateable value depending on their location. Thanks to all the data in its possession (in particular rents paid) which are generally updated every 5 years, the VOA will assign a nominal value per square metre which will become the reference for the calculation of the rateable value.

For example the nominal square metre for a 90m2 shop on Camden high street is worth £2,000. Assuming that this shop is separated into 3 equivalent zones, its rateable value will be:

Area A: 30m2 * £2,000 = £60,000

Area B: 30m2 * £1,000 = £30,000

Area C: 30m2 * £500 = £15,000

The rateable value will therefore be £105,000. Note that this is not what you will pay (even if it is often the amount indicated on advertisement).

Once the rateable value is assessed, this amount has to be multiplied by the standard multiplier which is set annually by decree. For the year 2022/23, it is 51.2p to the pound.

Back to our example, the business rates due will therefore be £105,000 * 0.512 = £53,760

Some modifications can be made to this calculation especially if your rateable value is less than £51,000. In this case the small business rate multiplier of 0.499 is used.

As you can see, calculating business rates can quickly become complicated. The important thing to remember is that you will have to pay this tax in addition to your rent and it will amount to approximately 50% of the rent.

Is there any help available to cover business rates?

Business rates are always a bad surprise for those not prepared for them. Unfortunately, there is no magic formula to escape them but there are a few tricks to try to lower the bill.

  • Small business rate relief. If your rateable value is less than £12,000, you will be exempt from business rates. Between £12,000 and £15,000 a pro rata amount will apply.
  • COVID relief. The COVID lockdown was obviously a difficult time for high street retailers and various exemptions have been put in place and are still applicable. Thus until the end of March 2023, subject to conditions, you can still benefit from a 50% discount on business rates.
  • Empty building relief. It is possible not to have to pay the business rates for 3 months if the premises are empty during this period. Note that this is not necessarily automatic when signing a new lease. It may be possible that the landlord have already used this relief before the start of your lease.
  • Hardship relief. It is possible to request help from the council which can, at its discretion, decide to support a company. However, you will have to present a solid case and have good arguments to benefit from it.

Finally, it is always possible to challenge the rateable value of your premises. An appeal process is in place to review the amount with the VOA. This can be done if you believe that the measurements of your premises or the value of the nominal m2 are incorrect.

It’s a long process (COVID hasn’t helped either) and can be a double-edged sword if the result goes against you.

Also beware of the many companies that offer a “no win, no fee” appeal. Whilst some are serious, most will charge you unreasonable administrative fees.

What’s the future?

The business rate system is regularly blamed for the disappearance of retailers on the English high street. They believe they being unfairly penalized in comparison to the e-commerce giants who are much less taxed though still benefit from infrastructures partly paid for by business rates.

The system is also criticized for its lack of flexibility, in particular because the reassessments are only made every 5 years which can cause a distortion in relation to the reality of the market.

Finally, for businesses struggling to make a profit the sums requested may seem exorbitant and disconnected from the business activity.

What is the solution? There have been many suggestions without a consensus having been reached yet. There are talks on taxes for e-commerce or again an increase in VAT in exchange for a reduction, or even the cancellation of business rates. Negotiations are ongoing. One thing for sure, lowering taxes will be challenging when nearly £30 billion pounds are returned to the coffers of the state every year.

Have you got any queries ? Do you feel you need to be supported in your commercial estate project? Call us, we will take care of everything!