Business rates: What you need to know about the upcoming changes

What are business rates?

Business rates are a tax on business properties such as offices, shops, pubs, warehouses, factories, guest homes etc.

If you use a building, or part of a building, for business or non-domestic purposes then you will most likely have to pay business rates.

Business rates are charged in proportion to the value of a property, estimated by government surveyors, which means that if you run a business in a thriving area where property prices are high, you’re likely to pay higher business rates. For example, a shop owner in Central London will likely pay more in business rates than a shop owner in the North of England.

Currently, you can get small business rate relief if your property’s rateable value is less than £12,000 and your business only uses one property. From 1 April 2017, this threshold will rise to £15,000. 

You won’t pay any business rates if your property’s rateable value is £6,000 or less, therefore you get 100% small business rate relief.

From April 1 2017, you will be able to get 100% business rate relief if your property’s rateable value is £12,000 or less.

The changes to business rates from April 1

On April 1, there will be a revaluation of business rates where the government will adjust the value of business rates to reflect changes in the property market.

The government postponed the last valuation from 2015 to 2017 to avoid it clashing with the general election so rate bills are expected to increase markedly. The average micro-business, which employs fewer than 10 people, is expected to have to pay £17,000 to cover business rates from April.

London businesses set to be the hardest hit

For businesses in London, some are expected to face business rate increases of up to 100%. It’s anticipated that London as a whole will see an increase of £9bn paid in business rates by 2022.

One London start-up, Hirespace, estimates that its business rates will increase by around £30,000 a year. Its co-founder, Edward Poland, has commented that the company’s “ability to grow will be directly hit by the proposed changes”.

What do the changes to business rates mean for start-ups and small businesses?

According to a report from the Federation of Small Business (FSB) published on February 27, the increase – or “rates bombshell” as it refers to it –  is expected to “shock small business growth prospects” and “could have massive consequences”:

A study of 675 FSB members found that – as a result of business rates rising – “a significant proportion of small businesses across Britain are preparing to reduce investment and staff costs”. 44% of small business owners said they expect their business rates to eventually rise by more than £1,000 per year while 21% expect to see their annual bill increase by more than 40%.

Of the one in three small businesses facing a rise in rates, 54% expect profits to fall and 38% intend to increase prices. Crucially, 55% plan to reduce, postpone or cancel investment in their business, which will impact UK productivity and growth, while a worrying 19% said they “may ultimately close down or sell their business” as a result of a hike in their bills.

Demise of the high street? 

For small independent businesses in prosperous areas, the rates rise could also equate to a struggle for survival. For instance, retail expert Mary Portas has predicted that independent shops and retailers will be replaced by chain cafes and restaurants.

This prediction is echoed by a recent AXA Business Insurance study which suggests that the business rate increases will “threaten the survival” of small UK shops. Darrell Sansom, managing director of AXA Business Insurance, believes the impending rates hike places “further burdens on the shoulders” of small retailers:

“Our small shop surveys reveal that many are hanging on and simply do not have the spare income to cope with the 180% tax increase expected in some areas of the country.”

Which leads us on to the following point…

How have business owners reacted to the impending business rates increase?

Are business owners happy about the changes to business rates? The short answer is a big, fat ‘no’.

Over the past few weeks, we’ve seen business owners, entrepreneurs and industry groups rally together to speak out against the upcoming changes and the policy issue has been a major focus of the press. Importantly, the FSB is lobbying the government to reconsider the changes and been campaigning heavily against the increase.

Possible solutions to the “rates bombshell”?

Mike Cherry, FSB chairman, has suggested that the chancellor Philip Hammond uses the spring Budget on March 8 “to announce a cross-party commission to propose measures for a replacement business tax system linked fairly to the ability to pay”.

The FSB has also argued that the chancellor make a ‘London business rates concession’ – increasing the rates threshold to £20,000 for businesses in inner London and £15,000 in outer London – to enable smaller firms to avoid paying tax.

This rate threshold increase would cost the government £100m; a cost which the FSB believes to be a “comparatively small amount in the context of the £28bn revenue derived from business rates nationwide”.

Does the government plan to address business owners’ concerns about business rates?

Yes. Earlier this month – in response to backlash over the planned increases – the government issued a statement promising measures for those businesses hardest hit by the steepest increases in business rates.

While the government has defended its reforms and claimed that 2017 to 2018 will see “the biggest ever cut in business rates”, business secretary Sajid Javid has said he is aware of problems for some and has promised help.

Prime minister Theresa May has also acknowledged that it is important to support businesses that “will be particularly adversely affected”. May has asked Javid and Hammond to “make sure there is appropriate relief in those cases” with the duo expected to make an announcement on how to proceed some time in March.

What happens if business owners want to appeal their new business rates?

The business rates that business owners pay is determined by its rateable value, set by the Valuation Office Agency (VOA). You can check the rateable value for your business property here, and you can then contest changes to the valuation or property details if you think they’re wrong.

If you want to appeal the business rates you’ve been set, then you will need to make sure you have grounds for appeal; check here, and then you can appeal to the VOA. You will need to continue to pay your new business rates bill during the appeal.

If you’re not able to agree on the rateable value with the VOA, you can take your case to the Valuation Tribunal (this is a free service but you have to pay for your own costs).

Useful resources on business rates

How to calculate your business rates
Small business rates relief explained