What are business rates and do I have to pay them?

If you operate business premises – and even if you work from home – you need to be aware of business rates.

They can be a hefty cost for a small business, so it’s important not to overlook them when working out your business plan.

Fortunately there are various exemptions and reliefs available for business rates, so you need to know about these.

What are business rates?

Business rates (sometimes called commercial rates) are a tax levied on business properties. The money collected is channelled by local authorities into services such as police, fire and waste management, in much the same way as council tax.

Just like council tax, business rates are an annual bill paid in ten equal instalments. This means that if you miss a payment you will have to make bigger payments to cover the outstanding amount.

Do I have to pay business rates?

If you use a property for business purposes then in most cases you’ll have to pay business rates on it. This includes shops, offices, pubs, warehouses and factories and so forth, but also holiday properties (that you rent out) and other rental properties.

What about business rates when working from home?

It’s important to note that if you use a part of your home for business purposes, you may need to pay business rates on the portion of the house you use. This won’t apply if you simply use your bedroom as an office, or sell goods from home.

But if part of your home is exclusively used for business - often referred to as 'non-domestic activity' - or if customers or staff spend time at the property, then business rates may be chargeable. To find out whether you need to pay, and how much, contact the Valuation Office Agency (VOA).

How do I estimate business rates?

To work out your business rates, you need to know the ‘rateable value’ of your property. This is managed by the VOA, which currently uses the open market rental value of the property on 1 April 2015 to calculate how much you will be charged for business rates.

To estimate how much you will need to pay, multiply the rateable value of your property by your ‘multiplier’ (which tells you the number of pence you will pay per pound of rateable value). If the rateable value is £51,000 or over, use the standard multiplier. If the rateable value is under £51,000 you can use the small business multiplier.

If your business grows to the point where you need to change your premises or combine two previously distinct properties, you need to report the changes to the VOA. If you don’t do this in time, you may have to pay a backdated increase in your bill.

Calculating your business rates - an example

Suppose you run a small shop with a rateable value of £10,000. As it is under £51,000 you would use the small business multiplier, which is 49.1 pence for the year 2019-2020. The value of £10,000 multiplied by 0.491 is £4,910.

This makes the default level of your business rates £4,910 for the year. However, as your rateable value is under £15,000 you can apply for small business rate relief to reduce it.

What to do if your business moves to a new property

You must also report any changes in the nature of your business, or if you start subletting part of your property to someone else.

Will my business property be subject to revaluation?

The Valuation Office Agency (VOA) usually revalues business properties every three years to allow for changes in the property market. The next one is likely to happen in April 2021 and will most likely be based on the rental values seen in April 2019.

A revaluation to a higher price will usually mean your business rates will go up, unless your multiplier (see above) is revised downwards at the same time. You should check your current valuation whenever you estimate your business rates.

Applying for business rates relief

You will not necessarily have to pay your full estimated amount of business rates, as there are several ways you can reduce your business rates bill.

Many reliefs exist for certain kinds of organisations, which for a small business can make a crucial difference to margins. Make sure you are aware of every exemption and loophole when working out your business rates.

Here are a few of the main reliefs:

Small business rate exemption

In England, small business rate relief is available to businesses that only use one property with a rateable value less than £15,000. The relief means that businesses with a rateable value of £12,000 don’t pay at all, and those with a value of £12,001 to £15,000 pay a much lower rate.

Rural rate relief

If you operate in a rural area with a population of 3,000 or less, and you are either the only shop, pub or petrol station with a rateable value above a certain level (£8,500 for shops and £12,500 for the other two property types), you will be totally exempt from business rates.

Charitable rate relief

If you are a local charity or community amateur sports clubs, you could be eligible for an 80 per cent reduction in your business rates.

Transitional relief

If your property is revalued then your business rates bill may change. Transitional relief limits how much extra you can pay each year, so that increases are phased in slowly. If you're eligible for this relief, the council will adjust your bill automatically.

Enterprise zones

If you are starting your business in an enterprise zone, or moving your business to one, the council might offer relief on business rates.

There are various other reliefs available, so ask an accountant or financial adviser about others that may apply to your business.

Retail discount

If your business is a shop, restaurant, café or pub/bar, then you may be eligible for a retail discount. Assuming your property has a rateable value of under £51,000, you can reduce your business rates bill by a third. This is on top of any other reliefs you may qualify for. Contact your local council to see if you are eligible.

Can I appeal my business rates bill?

If you think your business rates have been set at an unfair level, whether due to an incorrect valuation or multiplier or both, you can appeal to the Valuation Tribunal Service.

You can also lodge a number of other appeals relating to the decisions of the VOA, such as penalty notices issued to you.

Can I avoid business rates altogether?

If you run an online business from home that does not involve turning part of your home over to non-domestic activity, you may not have to pay business rates at all.

Find out more about running an online business.