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How do business rates work?

Business rates are a major tax on business, but might be overlooked by accountants. They are excluded from the tax expense shown in accounts and might not be considered as part of tax planning. Find out more about the current UK business rates regime, including how rates are calculated and why is it hard to know exactly what a business owes.

What are business rates?

Business rates are a tax paid by UK businesses on the property they occupy. They are also paid by other occupants of non-domestic properties (for example, fire departments, utilities, etc).

The tax is based on an estimate of the rentable value of the premises, as calculated by the Valuations Office Agency.

Properties are exempt if used for: worship, agriculture, or the training or welfare of disabled people. Certain others uses/categories of property qualify for full or partial rates relief. The smallest businesses can also qualify for relief.

How are business rates calculated?

The basic calculation of business rates is relatively simple. In England and Wales:

  1. Find the ‘rateable value’ for the business premises. This is an estimate of its rental value on the open market on 1 April 2015.
    Find your rateable value.
  2. Identify which of the two national ‘multipliers’ apply to the premises; the standard multiplier or the small business multiplier. Different multipliers apply in Wales and the City of London.
    See multipliers for the current and past years.
  3. Multiply the rateable value by the multiplier. This shows how much is due in business rates (before any reliefs).
  4. Deduct any reliefs that the business is entitled to. For example, transitional relief may apply or the business might be eligible for small business relief (in addition to applying the small business multiplier).
    Find out about reliefs you might be entitled to.

Why is it hard to know exactly what a business owes?

Although the calculation is simple, working out the exact level of liability for each business can be very complicated. This is because:

  • The ‘rateable value’ for each individual premises is bespoke, and a degree of subjectivity is involved. For example, the rateable value of a retail premises entails a complex calculation that includes factors such as the width of the frontage and the depth of the shop. Many valuations are appealed as a result.
  • Rateable values are updated periodically and complex transitional reliefs are applied to smooth the effects of the change.
  • Reliefs are not applied as a matter of course and must be claimed individually under a variety of different schemes. Complex rules apply where the business has more than one premises.
  • The multipliers change every year, either to reflect RPI or the effects of revaluation.

As a result many businesses turn to professional advisors for assurance that the rate they are paying is appropriate and for advice and support with the appeals process. Indeed, most businesses have historically chosen to have their assessment reappraised, with many then challenging the assessment.

How could business rates be reformed?

Business rates are under increasing strain. Competition from online businesses is reducing the benefits of physical premises. Meanwhile, the system for assessing business rates is complex, costly and time consuming. UK businesses have made it clear that a reform is overdue.

Share your views on business rates reform

ICAEW wants to move the debate on reforming business rates forward and wants to hear your thoughts. Join the discussion on ion.icaew.com/taxfaculty, on Twitter using #BizRates or email us at: businessrates@icaew.com.