“Business rates” are a tax levied on commercial properties in the UK, collected by the government to fund local services, such as waste and disposal collection. The payment amount varies depending on the rateable value and the business rates multiplier set by the government. But how are they calculated?
Real Business has put together this article to answer this question, giving you the formula to understand what may be expected of you or your business via the business rates bill.
Table of Contents
How Are Business Rates Calculated?
Standard business rates apply to most businesses, and small business rates apply to some small businesses. Accurate property details are essential for ensuring correct business rates valuation. The criteria for the smaller value is that the rateable value must be less than £15,000.
The basic formula by which business rates are calculated is:
- (Rateable value of property) x (Business rates multiplier) = Basic business rates payable.
Businesses can choose to pay this monthly, quarterly or annually. It’s advantageous to know a rough cost estimate and factor it into their budget.
What Influences The Basic Business Rates Payable?
The rateable value of the property and business rates multiplier are multiplied together to get the basic business rates payable.
Professional commercial property valuations determine the rateable value, which is an estimation of the annual rent a property could cost on the open market. Location, property type, size – these types of factors affect valuation, as a large retail store in central London has a greater potential for profit than a small warehouse in the outskirts of the city.
The business rates multiplier has been set by the government each year according to the retail price index inflation rate. This, alongside the value of the premises and discounts due, will affect the final sum.
What Are The Pros And Cons Of Business Rates?
Some of the advantages include:
- They are a tax that is based on the value of the property, which means that businesses with higher-valued properties pay more.
The money raised through business rates is used to fund local services, such as schools and roads.
- Business rates can be a significant source of revenue for the government.
Some of the disadvantages of business rates include:
- They can be a significant expense for businesses, which can impact the price of goods and services sold.
- Business rates are set by the government and can be increased without much notice, which can make budgeting difficult.
- Some businesses may be entitled to discounts or reliefs, which can create an uneven playing field.
What Is The Rateable Value Meaning?
Find your rateable value here.
The valuation office agency sets a value band (similar to council tax bands) for each commercial premise, reviewing these bands every five years against the current status of the property market.
To give you a rough idea of where your property may fall, here are the rateable value bands for 2023/24 in England:
- Band A: Up to £15,000
- Band B: £15,001 – £34,800
- Band C: £34,801 – £92,000
- Band D: £92,001 – £192,000
- Band E: £192,001 – £426,000
- Band F: £426,001 – £860,000
- Band G: £860,001 – £4,000,000
- Band H: Over £4,000,000
What Is The Business Rates Multiplier?
The business rates multiplier is calculated using the retail price index (RPI), set by the government each year. There are two types: the standard multiplier and the small business multiplier. These multipliers are adjusted annually, typically in alignment with inflation.
For business rates, the RPI is the percentage change in the index over 12 months and this figure, in conjunction with a property’s rateable value, will be used to determine the cost of business rates paid.
Liability And Occupation
Liability for business rates falls on the occupier of a non-domestic property. Occupation is determined by the physical use of the property, no matter how minimal that use might be. In situations where there are multiple occupiers, they may be jointly and separately liable, meaning each occupier can be held responsible for the full amount of the business rates.
It’s important to note that liability for business rates can change if there are changes in the occupation of the property. For example, if a property becomes vacant or is only partially occupied, the liability for business rates may be adjusted accordingly.
Transitional Relief And Exemptions
Some types of properties can apply for exemption from business rates. These exemptions include:
- Properties with a rateable value of £12,000 or less, may qualify for small business rate relief.
- Charities and community amateur sports clubs can receive mandatory relief.
- Places of public worship, are also eligible for mandatory relief.
- Properties used for the provision of childcare may qualify for discretionary relief.
To qualify, properties must meet specific criteria, and businesses must apply through their local authority.
Can You Reduce The Amount Of Business Rates You Pay?
Yes, there are several ways. Relief schemes are considered the official method of reducing business rates. Tax relief in particular is available if you’re in a disadvantaged area. In 2022, there was a 50% reduction in rates for retail, hospitality and leisure to try and combat the impact of the Covid-19 pandemic where businesses in these industries suffered. Cinemas, for example, faced significantly reduced business rates.
Your local authority will have a page dedicated to business rates on their website, so if you want to check the rateable values or submit an appeal, this is the best place to start. To find out more about reliefs and discounts, contact your local authority or visit GOV.UK.
A few things to note:
- Listed buildings are protected by law and so will have a higher rateable value.
- Older properties can be more expensive to insure and maintain and are likely to have a lower value. If a building is in good repair, it’s more valuable than one in need of a lot of work.
- If the property is in a popular area, values will skyrocket compared to locations where fewer people want to be.
The Revaluation And Appeals Process
The VOA will review all commercial properties every 5 years to assess their rateable values and the next one is due in 2027. These values reflect the market as of a specific set valuation date, which is essential for calculating accurate business rate bills. Appeals can be made to the VOA via its website if you disagree with the rateable value of your property.
You would need to submit evidence to support your claim and this could include information on the age, conditions, size, local rental values and more. The claim will be reviewed by an independent tribunal if the initial appeal is not successful. If you don’t think your property is in the right valuation bracket, you can appeal the valuation it’s been given. The appeal can result in a lower bracket, but beware that the reverse could also be true.
Do I Have To Pay Business Rates If I Work From Home?
For most home workers, there are no business rates payable if you work from home. You may be required to pay business rates if you sell goods/services to people from a commercial part of your residence – for example, a flat over a shop. But If you run an online business from home that doesn’t take over part of your home then you won’t have to pay business rates at all.
It’s important to make sure that you pay all rates due as a business owner, so if you’re in any doubt as to whether you need to pay business rates, you should contact the Valuation Office Agency (VOA) or if you live in Scotland, you’ll instead need to get in touch with your local assessor.
Conclusion
In summary, business rates are a tax obligation payable for non-domestic (commercial) property in the UK. The amount owed is worked out using rateable value and a multiplier set by the government annually.
Businesses should make sure they understand how business rates are calculated and the options available to them so that they’re not over or underpaying. This is a large cost that can impact the bottom line of a company, so making sure you’re paying the right amount can significantly help your operations.
FAQ: What Is Inflation?
The RPI is not the only measure of inflation, but it is one of the most widely used. Other measures of inflation include the Consumer Prices Index (CPI) and the Producer Prices Index (PPI).
Inflation is a general increase in the prices of goods and services in an economy. The main cause of inflation is too much money chasing too few goods – when aggregate demand outpaces aggregate supply, prices start to go up. This can lead to a vicious cycle, where higher prices lead to even more demand. Inflation can be beneficial in a moderation sense, as it encourages people to spend rather than save.
However, excessive inflation can be very detrimental, leading to economic instability and asset bubbles. Central banks typically use monetary policy to keep inflation in check, raising interest rates when inflation gets too high and lowering them when it starts to fall. By doing so, they can help to ensure that the economy remains healthy and stable.
