An Introduction to Business Rates

Business Rates are essentially, Council Tax for commercial properties.  It is a very large consideration for companies seeking to establish themselves in new or moved premises.  This is because it represents quite a large expenditure that must be accounted for.

The Government agency responsible for establishing exactly how much should be paid by companies, is the Valuation Office Agency (VOA).  This is a large agency that has many employees many of whom are Surveyors. There job is to measure up almost all commercial properties in the UK and make a realistic assessment of the current rental value.  As you can imagine, this is not a small task.

As a property investor or developer, it is very likely that once you have carried out a few residential projects and made a success of them, you will be drawn to the commercial side.  In some respects, the commercial side of property is just like the residential one, and in other ways it can be very different.  Knowledge (at least a basic understanding) of Business Rates is important if you intend to choose the commercial route.  This is because when allowing for rent voids (periods when the property has no paying tenant) unless the property is below a certain value, you will need to cover them (if a tenant is in occupation, they should cover the payment of Business Rates for the property).  This can prove to be a substantial change to the financial side of your plan.

A commercial building is valued using the following procedure:

  • The building will be measured up, and a usable area will be determined.  These measurements and the area will stay on record on a very large database held by the VOA (records are viewable on-line).  If these areas have changed in any way since assessment, it is up to the occupant to notify the VOA as they might receive a business rates reduction.
  •  The property area will have a particular rate applied to it (in Sq Metres) this area will be multiplied by an appropriate value to produce a value for the building (so for example if an office property has an area of 200 Sq Metres, and a rate of £40 per Sq Metre is applied, then the value will be £8,000 (£40 x 200). If the property has rooms and areas that are incidental to the main area, those smaller areas will be assessed on a different rate.
  • The VOA re-assesses each property every 5 years.  This means that although it doesn’t have to be re-measured, a new rate per Sq M is used to establish a value.  This value is known as the Rateable Value.  This means that the VOA believes a certain property is worth a certain amount, on a certain date.  It does not have to reflect a current market rate.

A quick referral to the website of the VOA (link here), will provide you with a multiplier.  This is then used to calculate the property business rates that the occupier must pay each year.  For example:

Using the methods above, a property rateable value is established to be £20,000.  This figure is essentially what the VOA believe would have been an appropriate annual rent in the year the property was last assessed by them.

The ratings multiplier for 2010/2011 was 41.4.  This multiplier changes every fiscal year, so regular checks are important.  The multiplier means that for every £1 of property rateable value, the occupant must pay 41.4 pence to the Local Authority for Business Rates.

So, if a property has a rateable value of £20,000, the Business Rates will come to £8,280 ((20,000 ÷100) x 41.4) per year.

A Small Business Rate relief scheme is in place, which allows qualifying companies to use a slightly lower multiplier figure.  For 2010/2011, it is 40.7.  Obviously this doesn’t make a huge difference, but for qualification of the status of ‘Small Business’, the company must occupy premises with a rateable value of less than £6,000, in which case it will receive a 50% discount from Business Rates (note that a full relief from business rates has been temporarily introduced until Sept 2011 if premises have a rateable value of less than £6,000).  Tapered relief is the applied if properties have rateable values of between £6,001 and £12,000.

Please note that the above paragraph is also liable to change on a fairly frequent basis, so check regularly with local authorities and the VOA. 

There is currently certain business rate relief for empty properties:

  • Shops and office properties are exempt from paying business rates for the first 3 months of being empty.  After this period, full rates are payable.
  • Industrial properties are exempt for the first 6 months of being vacant.  After this (in common with the above) full rates will apply. 

Some properties are exempt from business rates for the full duration of their vacancy:

  • Properties with a rateable value of less than £18,000
  • Empty properties of companies that are in liquidation or administration.
  • Listed buildings 

To find the details of a particular property on the website of the VOA, follow this link.  To find a property, you can search by postcode.  You are likely to be presented with a list of properties, which are listed by property number or name.  Some patience is likely to be needed for this, as some properties are listed under postcodes and addresses that you might not expect them to be.  Quite detailed results will be available (around 90% of all commercial properties are available on the database) and it is usually possible to obtain area calculations of included properties too. 

A list of publications is available on the VOA website (link here) for properties that seem to be neither fully residential nor commercial, such as stables or guest houses.

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