New business rates could see small firms priced out of coworking spaces

Reforms to the business rates system have been a hot topic of conversation among businesses, big and small, as they’re set to raise costs across the country for many.

One unexpected consequence of the rate changes is that they are also set to increase costs for the UK’s coworking sector. 

By taxing coworking spaces as single entities rather than individual units, the changes effectively remove access to Small Business Rates Relief, which has raised concerns about the access and affordability of shared workspaces for smaller businesses.

Cost increases threaten coworking model

The Valuation Office Agency (VOA) has changed how coworking spaces are taxed, meaning that owners may face overall higher tax bills. The likelihood is that these increases will be passed on to tenants through higher desk rates and rents. 

Analysis from ChamberlainWalker Economics estimates that the change could add a not-insignificant £600m a year in costs across the sector. Spread across businesses, this could work out to individual small businesses facing increases of more than £5,000 each year.

This completely undermines one of the key advantages of opting to use coworking spaces over a fixed office: the low upfront costs and flexibility.

As Joe Phelan of money.co.uk warns, treating spaces as a single taxable entity risks pushing a “significant cost burden” onto small businesses, many of which are already operating on tight margins. 

Even relatively small increases, he notes, could have a direct impact on cash flow and force businesses to rethink whether these spaces are still a sensible option, or if they should explore cheaper or free workspaces.

For coworking spaces, the situation is equally challenging. Higher vacancies could lead to the real potential of site closures, if rents become unaffordable and tenants scale back or leave altogether. 

Wider economic impact extends beyond offices

The ripple effects go beyond coworking spaces and their tenants. These hubs often play a key role in supporting local economies, particularly high streets, by driving daily footfall to local cafés, shops and services.

Estimates suggest up to 150,000 workers could be pushed out of shared offices as costs rise, leading to a potential £260m annual hit to high street spending if people revert to working from home. 

Phelan highlights this broader risk, noting that if businesses are priced out, the impact “won’t be contained to the workspace itself,” but will affect surrounding businesses that rely on the steady flow of weekday customers that coworking spaces attract.

Policy tension raises concerns for SMEs

The changes have sparked criticism throughout the sector, with industry bodies and coworking spaces themselves warning that they contradict the government’s intentions to help drive economic growth.

Startups, freelancers, and high-growth smaller businesses use coworking spaces the most, and are also exactly the sorts of businesses that the government hopes to encourage.

And despite ongoing discussions with the government, no resolution has been publicly announced as of yet, which leaves both coworking spaces and their users in the dark as higher costs begin to trickle down.