Updated 30 March 2022
Business rates are becoming one of the biggest overheads for small businesses that have premises valued at over £12,000. With recent valuation surges proving devastating for some, are there practical solutions for business owners who want to minimise their bill? Article by Nick Green.
Brexit and the NHS aside, one of the key battlegrounds in the upcoming General Election is expected to be business rates, in particular their impact on smaller businesses. The UK’s high streets have long struggled to compete with online shopping, and the rising costs of maintaining a physical shop, office or outlet are pushing many entrepreneurs to consider giving up the fight – with a serious knock-on effect on local economies.
Although the purchase price of business property is lower than residential, the true cost of occupying commercial premises lies in the business rates. Business property is assigned a ‘rateable value’, loosely based on how much rent could be charged for it per year (but not always equal to the actual rent charged). A business occupying those premises has to pay approximately half that value in business rates, every year (though reliefs are available, especially for small businesses).
Business rates can be manageable if a business has factored them into its financial forecasts. The danger comes if and when premises are revalued. Rising rental values mean that some small businesses have seen their rates double, triple or quadruple in as little as a year.
Some have been hit even harder. Bar owner James O’Hara converted a disused public toilet in Sheffield into an underground cocktail bar, with refurbishments costing £120,000. But this had the side effect of increasing the property’s rateable value from £3,250 to £23,750. As a result, James’s business rates bill soared from £560 a year to £7,760 (after taking the relevant reliefs into account).
Similarly Sean Hughes, a St Albans publican, has seen the business rates on The Boot pub rise from £17,000 to £53,000, following the last revaluation in 2017. Service businesses such as pubs, cafés, restaurants and hairdressers are especially at the mercy of business rates, since they require a physical presence (unlike a simple retailer which may have the option of migrating online).
At November’s CBI conference, Prime Minister Boris Johnson pledged a ‘big review’ of business rates, while Labour leader Jeremy Corbyn also promised reforms, saying, ‘We know the damage they’re currently doing to our High Streets and communities.’
The Treasury Committee recently voiced its view that the business rates system is ‘broken’ and in need of ‘urgent review’. It said the system in England and Wales is too complex and puts an unfair burden on physical shops and manufacturers. In August more than 50 large retailers, including Marks & Spencer, Tesco, Vauxhall and Harrods, wrote to the chancellor calling for cuts in business rates to preserve the High Street.
Perhaps the most infuriating aspect of business rates is that they are based on the rateable value of the property, not just on how much money the business itself might be making. It is true that if a business performs well, this may increase the rateable value of its premises (since the property will be seen as a good place from which to trade). But premises may also rise in rateable value for reasons beyond your control, such as changes to local transport links, the activity of other businesses nearby, or general market movements.
The biggest business rates trap may be to do as James O’Hara did, and dramatically increase a property’s rateable value through refurbishments. Unlike developing a residential property, where you generally gain from the value you add, every pound of value added to your business premises means potentially another 50 pence (or near enough) paid out in business rates. Yet in some cases refurbishment is simply a necessary step, which places entrepreneurs in a dilemma. If your property’s value grows faster than your profit margin before tax, then the business rates can wipe out that profit margin. In trying to boost your business, you end up shooting it in the foot.
Business rates are calculated by taking the rateable value of the premises (e.g. £15,000) and multiplying by the ‘multiplier’ set by the Valuation Office Agency (VOA). For premises valued at below £51,000 this multiplier is 49.1% in the 2019/20 tax year (for more expenses properties it is 50.4%). Note that business rates apply whether the business owns the property or rents it.
The VOA usually revalues business properties every three years to allow for changes in the property market. The next one is likely to happen in April 2021 and should be based on rental values seen in April 2019. The good news is that valuations can go down as well as up – but if they rise, then so will your rates.
Your valuation can also change between these times if there are significant changes – such as refurbishments or extension to the property, subletting of the property, or a change in the nature of your business. All such changes must be reported as they happen, or else you may receive a backdated bill later on.
If your premises’ rateable value is below £15,000 (and it is your only premises) it will qualify for the small business exemption. Properties valued at £12,000 or below get 100 per cent exemption, so you don’t pay business rates at all. There is then a sliding scale from £12,000 upwards, until you pay full business rates on properties valued at £15,000 and over.
Various other business rates reliefs are available in addition to this. If you’re in retail (e.g. a shop, restaurant, café or bar) then you can reduce your business rates by a third with the retail discount. Businesses in Enterprise Zones can also get reduced or even zero rates, and some rural businesses (such as the only shop in a village) can also be totally exempt from business rates.
There is also something called transitional relief, which may apply if your property is revalued at a higher level. This can serve to phase in any increases to your business rates bill, and should apply automatically.
Remember too that business rates are a tax deductible business expense, so you can deduct the cost of paying them from your profits before calculating your tax.
If a revaluation of your business premises sends your bill soaring, it is entirely possible that the VOA has made a mistake and has over-valued the property. In this case, you can appeal to the Valuation Tribunal Service. It will help if you have some evidence to support your belief that the property is valued incorrectly, for example:
A specialist rating surveyor will be invaluable here, as they can assess the true rateable value of your premises based on firm evidence on local rental agreements. This will give you a clearer idea of whether or not you have grounds for appeal. Your accountant will also be useful, as he or she will help you assemble the necessary evidence from your accounts to support your claim that your rateable value is too high.