Telling the truth about SME life today

Understanding Business Rates & How They Are Calculated

how are business rates calculated

Business rates are a tax levied on commercial properties such as shops, offices, factories and warehouses in the UK. Business rate payments vary depending on rateable value and the business rates multiplier which are both set by the Government. Business rates are similar to council tax paid by residential properties.

Business rates calculations are made by: 

(Rateable value of property) x (Business rates multiplier) = Basic business rates payable.

Read on for more detail on how business rates are calculated, what influences rateable value and how the multiplier is worked out. We will also cover ways to reduce business rate liability and who is eligible for this.

What Are Business Rates?

Business rates are a type of tax that businesses in the UK pay if they use a commercial property. The amount due is set by the GOvernment, but collected by local councils.

Shops, offices, warehouses and factories are all included in the taxable properties and the amount due can be significant.

Due to the amount due, businesses should factor the cost into their budgets and use the figures to calculate how much they need to sell their products and services to make a profit. Business rates can heavily impact the bottom line.

Standard business rates apply to most businesses, and small business rates apply for some small businesses. The criteria for the smaller value is that the rateable value must be less than £15,000.

The money collected from business rates is put back into local services such as road maintenance and schools.

What Affects How Much I Will Pay?

The value of the premises, the business rate multiplier, and discounts due will all affect the final price that a business needs to pay for their business rates.

Rateable value is determined by professional commercial property valuations. The valuation is affected by things like location, property type and its size. For example a large retail store in central London would have a much larger rateable value than a small warehouse in the outskirts of the city.

The business rates multiplier is based on the retail price index inflation rate (RPI). The government sets this each year as part of the budget.

Some businesses will be eligible for discounts and relief based on their size and earnings. Deprived areas or businesses that are considered good for the economy tend to be offered more favourable rates.

What Is The Rateable Value?

Business rates calculations are made by: 

(Rateable value of property) x (Business rates multiplier) = Basic business rates payable.

The rateable value element of the calculator can go up or down depending on the changes in the property market. Each commercial premises is allocated a value band (similar to council tax bands for residential properties). The valuation office Agency (VOA) sets the values and reviews the bands every five years, with the next one due in 2027.

For example, if a property is worth between £0 and £150,000 it would be in band A. £151,000 – £250,000 would be band B etc. Small businesses get a break as if the premises is valued as £12,000 or less, then no business rates are due.

Find your rateable value here

Professional valuers set the rateable value of each property. 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

Wales, Scotland and Northern Ireland have slightly adjustment bands so you should check the gov.uk website for further information in those areas.

What Is The Business Rates Multiplier?

The business rates multiplier element of the business rates calculator is calculated using the retail price index (RPI) inflation rate and it’s set by the Government each year.

RPI measures the change in the price of goods and services purchased by UK households. It’s worked out by taking the cost of 700 goods and services and taking the average price it would cost to buy them. This method has been used since 1947 and is useful in helping the government and businesses to make decisions on how much people should be paid, the value of contracts, and setting prices.

The RPI has a real term impact on people’s lives due to its ability to increase or decrease the price of essential goods and services that people need to live, including business rates.

For business rates, the RPI is the percentage change in index over 12 months and this figure, in conjunction with your property’s rateable value, will be used to determine the cost of business rates paid.

The Business Rates Calculation

As above, the property value and business rates multiplier is used to calculate the amount of business rates that businesses are required to pay.

To work out your bill, multiply your property’s rateable value by the Business Rates Charge (known as the multiplier).

  • Standard Business Rates Multiplier for 2022/23: 51.2p
  • Small Business Rates Multiplier for 2022/23: 49.9p

For example, if you have business premises with a rateable value of £10,000, it would qualify for the small business multiplier.

  • £10,000 (rateable value) x £0.499 pence (multiplier) = £4,990 (basic business rates)

 

Can You Reduce The Amount Of Business Rates You Pay?

As you would expect, there are ways to reduce the amount of business rates due in some circumstances. These relief schemes are official ways to reduce the amount of tax that a business would need to pay for business rates.

If you don’t think your property is in the right valuation bracket, you can appeal the valuation it’s been given. If the outcome of the appeal isn’t what you wanted, you can get a further review from an independent valuation tribunal.

Tax relief is available if you’re in a disadvantaged area, rural area, and 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 really suffered.

Restaurants, cafes, bars may be able to reduce their bill by a third if the property has a RV of under £51,000 and businesses set up in Enterprise zones could also be eligible for discounts. Contact your local council for eligibility.

If you help to run a sports club or charity, the premises used may also be eligible for business rates relief.

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.

As business rates are such a big overhead for businesses, it pays to work with an accountant or tax advisor to try and reduce your bill as much as possible by using the business rates relief schemes available to you.

What Affects The Value Of A Commercial Property?

Commercial property valuations are impacted by a number of factors including; size, location, demand, type of property, condition, age, listed status and more.

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 so 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 sky rocket compared to locations where less people want to be.

These are just some of the factors that can affect commercial property values and a commercial valuer will be able to take all of these and more into account when providing a professional valuation.

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. 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.

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. Particularly if you only use a small portion of your home for work and if you sell goods by post. You may be required to pay business rates if you sell goods/services to people from your property, the commercial part of the property is attached to your home – for example a home over a shop, and if you employ people at your home.

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.

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 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 in the economy outpaces aggregate supply, prices start to go up. This can lead to a vicious cycle, where higher prices lead to even more demand, driving prices even higher. Inflation can be beneficial in a moderational 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.

Summary

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 may be eligible for discounts or exemption from this heavy cost burden via relief schemes and appeals processes.

Businesses should make sure they understand how business rates are calculated and the options available to them so that they’re not over or under paying. This is a large cost that can really impact the bottom line of a company, so making sure you’re paying the right amount can significantly help your operations.

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!