Business rates in the UK, particularly in London, are at a very high level—sometimes as much as half of the annual rent or even more. As Steve Hile, partner at Gerald Eve explains, this can be an unpleasant surprise to people opening spaces in the city or expanding into the London market.
“Certainly for people coming into the market from the States or elsewhere,” he says, “it’s often a bit of a shock to the system. If your rent is £100,000, you could potentially pay £50,000 in rates annually.”
He adds, however, that there are ways to mitigate the tax. In his GCUC UK Ask the Expert sessions, “How to Save Money on Business Rates and Property Costs,” Hile will advise space owners and operators on making good decisions when it comes to rates.
Advising Space Operators on Rates
Hile advises that operators check the rateable value of a space and location before entering the marketplace. This information is publicly available. It will however, change in most of London in 2021, so be aware that in just over 18 months, rateable values will likely be higher.
Another tip is to look at the rateable value in different areas of the city. London, like any capital city, has high rates, but the rateable value varies across the city.
Operattors may find that the rate drops dramatically if they open a space two streets away from where they’re currently looking, or even on a different floor of the building.
Rates and Occupancy
Another factor for workspace operators to consider is that, once you have one tenant in a shared workspace, it is considered occupied, as far as rates. Therefore it can be better to break this space up into smaller units, so that relief can be obtained on individual parts.
“As soon as one person moves in, it’s treated as occupied and you’re paying that tax,” says Hile. “What you need to look to do—what we often do—is have clients break that building up into multiple assessments or units. That way you can benefit from different tax reliefs. If you stick with that first assessment of the single space, you won’t get to claim those reliefs, so you will pay that £100,000 tax rate straight away. If you can break it up into smaller constituent parts, you should be to mitigate that liability considerably.”
London’s Mature Workspace Market
It wasn’t long ago that Regus was the main workspace operator in London, with 300-plus locations across the UK, including in smaller cities and provincial towns. Until about 10 years ago, they had no big competition. This was before workspace brands such as The Office Group entered the market. Now London is the most mature workspace market in the world.
Coworking and Reliefs
At the other end of the scale is coworking, with independently-owned spaces and a focus on supporting local communities. As Hile explains, lots of local authorities are setting up their own coworking incubator spaces to encourage employment.
“It’s getting people out of that spare room,” he says. “They want them collaborating and working together, and they need that space to do that. These spaces have to compete with large workspace brands including WeWork, IWG and The Office Group.” He adds, “They’re having to come up with their own bespoke buildings. It’s not just a spare local authority building, its proper coworking space.”
Although the authorities behind these spaces are collectors of the tax and property rates, they’re having to deal with the reliefs—or lack of reliefs–themselves.
“Coworking in particular, doesn’t get any reliefs. If you’ve got one person sitting in the space, it counts as occupied so you pay 100% of the tax. This is problematic for the workspace industry.
Clamour for Change
As Hile puts it, there is a “clamour for change around this.”
“Local authorities try to encourage these new small businesses,” he says, “but they’re struggling because of the business rates and there just isn’t the relief. There’s some generous reliefs out there, but they’re just not keeping up at the moment with the way the markets move.”
There are lobbying efforts to change this and to create some reliefs for small operators and coworking spaces. One of the challenges is to come up with a relief that goes to the businesses that need it and not to the workspace giants.
“The challenge they’ve got,” says Hile, “is how you make sure such relief would actually go to the beneficiary you wanted them to go to rather than the big corporates.”
The Workspace Sector is Not Going Away
The shared workspace sector, in the UK and around the world, is not going away. As it grows, coworking–people actually working together in open spaces—plays an interesting role. Some workspace operators believe they need it, but it doesn’t make sense financially, while others are absolutely committed to creating shared, collaborative spaces focused on community-building.
“I think you’re going to continue to have both,” says Hile. “The shame is that I think the coworking space model works really well, but with the lack of reliefs, it’s limited.”
For space operators facing this challenge, Hile advises putting up some walls that will mitigate the tax while also offering the open spaces that the end user needs or wants. Until business rate models changes, this will remain a challenge for small and independent operators.
“You’d like to think the authorities will catch up in ways of dealing with it,” says Hile. “That’s where a lot of new business is coming from and government is always going on about small businesses being very important.” He adds, “One of those small businesses will be the Amazon of tomorrow. You hope it will be.”
Steve Hile and his Gerald Eve colleagues will be at GCUC UK to answer questions about choosing the right space and saving money on business rates and property costs. Get your ticket to GCUC UK to connect with them, and reserve a free Ask the Expert session with Steve to get one-on-one advice.
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