The Treasury Committee has launched an inquiry into business rates to scrutinise how government policy has affected business. The retail sector and the high street have garnered the most press coverage in relation to this issue, but other sectors are also affected, such as small- and medium-sized enterprises (SMEs) in flexible and co-working space.
Flexible leasing is a big growth area for the property industry with increasing demand driven by start-ups and small businesses. In his 2018 Budget, Philip Hammond underlined the government’s commitment to helping people who want to start and grow businesses – but is the current business rates policy helping this sector as much as the government would like to think?
Small business rates relief (SBRR)
Businesses that occupy only one property in England can get relief on business rates for properties with a rateable value of less than £15,000. Relief is on a sliding scale, with no rates at all payable on properties with a rateable value of less than £12,000.
Clearly this relief is a major benefit to occupiers. However, there is a disparity between serviced/managed office occupiers who can benefit from this relief and those in shared co-working spaces, who will not.
- A small business occupying their own unit and having exclusive control of this space is generally deemed the rate payer and so will be eligible for SBRR. This is typical of most serviced office buildings or business centres which are split into different units and will have multiple rating assessments.
- If the same business is operating from an open co-working space, it will not be able to claim SBRR. The whole of the co-working space will generally be subject to a single rating assessment, with the rate payer liability falling on the office space provider, who then charges a proportion of the business rates to each occupier. Factor in additional rates supplements for large single assessment space (eg business improvement districts and the London Crossrail levy) and this proportion increases further.
- A further consequence of SBRR is that the threshold can influence business planning for SMEs. In some areas of Central London high rateable values mean that the threshold only benefits small units of say,
less than 300 sq ft. Small businesses considering expansion will need to carefully evaluate their space requirements, as taking on just one additional employee and expanding into a unit that is only 100 sq ft bigger could easily move a business above the SBRR threshold and into full business rates liability.
Alongside affecting SMEs’ decision-making process and growth, it could also be argued that the current rating system influences providers to carve up large spaces into smaller office units, which can be rated separately, rather than promoting them as open co-working spaces.
Multiple small units not only allow occupiers to claim SBRR, but they also entitle the provider to benefit from three months’ empty property rates relief each time an individual unit becomes vacant. This is one reason why many large co-working centres actually dedicate a large proportion of space to individual units.
Empty rates are already a significant burden for flexible workspace providers and this relief is essential in managing a constant churn of occupiers and vacant units to let, alongside the initial capital expenditure required to ready the space for immediate occupation.
Keep it simple and keep up!
Some of the criticism levelled at the rating system is its complexity and lack of transparency, whether dealing with rates payments or challenging assessments. The administrative burden associated with the rating system runs contrary to the flexible leasing ethos of easy-in/easy-out.
In some cases, landlords are trying to simplify leasing agreements for occupiers, offering a fee that is fully inclusive of rent, service charge, buildings insurance, business rates and utilities. However, in a serviced/managed office an agreement that is inclusive of business rates actually means that the provider is the ratepayer. To ensure SBRR is received the occupier either must take on the rating liability themselves or authorise the provider to manage the rates liability on their behalf. The former approach starts to defeat the object of all-inclusive leasing while the latter creates an additional level of administration and leaves the occupier relying on the provider to pass on the rebate.
The short-term nature of flexible leasing allows providers to adapt quickly to changing market conditions. Rateable values can quickly move out of kilter with market rents and affect SMEs, who can be particularly rent sensitive. One positive development is that future business rates revaluation cycles are reducing in frequency from five-yearly eventually down to three-yearly.
A much-needed review
It has long been debated whether the business rates system is still fit for purpose and it is encouraging that the government is currently carrying out an inquiry into the impact of business rates.
Flexible leasing is one area where it can be shown that the business rates system is becoming increasingly out of sync with how this dynamic market operates and can become a hindrance for providers in terms of administration, cost and decision making.
Businesses clearly benefit from small business relief schemes, but the fact that the government has had to introduce a number of these schemes shows there is something wrong with the overall rates system.
Business rates are generally considered too high and the simple solution would be a reduction across the board. In terms of flexible workspace, a general reduction in business rates (or a relief scheme extended to co-working) could incentivise providers to create more open work spaces, which would increase competition and drive down the cost to small businesses.
If the government is serious about supporting start-ups and small businesses in the UK, more reform of the rating system is essential.
Simon Webb is head of professional services at Workspace and Fiona Larcombe is a professional support lawyer at Maples Teesdale LLP
