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Business rates, cover all property consisting of land or buildings not classed as residential property or those which permanently or temporarily exempt from rates. These are also referred to as Non-Domestic Rates (NDR)

How Business Rates are Calculated

The Valuation Office Agency (VOA) is responsible for setting business rates based on government guidelines, this also includes some business assets (business rates are sometimes referred to as non-domestic rates). This article details how business rates are calculated.

Business rates, cover all property consisting of land or buildings not classed as residential property or those which permanently or temporarily exempt from rates.

Business rates apply to a wide range of property regardless of whether they are used for actual business purposes. They apply to, for example, beach huts and village halls as well as the shops, offices, and factories more commonly associated with business use.

If a property has a mix of residential and commercial uses, it will have both a non-domestic assessment (meaning it could be liable to business rates) and a Council Tax band.

New rating lists (which contain the rateable values for commercial properties) are normally prepared every five years. The latest revision was published on 1 April 2017.

Rateable value

The VOA gives a rateable value to each commercial property and this is used by local councils to calculate a property’s business rates.

A property’s rateable value is normally based on the rent the property could have been let for on a certain date as set in law. It may not be the actual rent paid on this date as the law makes a number of assumptions (such as the property being vacant, to let and in reasonable repair, and that the rent excludes any other charges, taxes or insurance). The rateable value is not the amount you pay, but it is used by local councils to calculate your business rates bill.

Some property categories that are not normally rented, such as schools and hospitals, are valued using the contractor’s test basis. In summary, this establishes the cost of replacing the building and, after adjustment, takes a percentage of the cost as the rateable value.

Property categories where the rental value is linked to turnover, such as public houses and large hotels, may be valued using their trading potential. This method is known as the receipts and expenditure basis.

For more complete documentation on the various rating methods take a look at the VOA Rating Methods Manual.

Setting a rateable value

For most properties that are rented, there are three stages to a valuation:

  1. The VOA collects rent evidence (rent and lease agreement details) for most non-domestic properties. This evidence is analysed and adjusted by VOA surveyors to ensure that all evidence is considered fairly. The approach will be different, depending on the type of property (for example, bed and breakfast properties are valued using different information from shops).
  2. For most properties, they set common basic values per square metre for similar properties in the same area. Larger properties may have a lower value per square metre, in the same way that buying items in bulk will usually mean a lower individual price per item.
  3. The VOA then adjusts the basic value per square metre to reflect the property’s individual features and applies this to the floor areas.

Some properties as mentioned earlier are not valued by using the floor area so the valuation approach uses another means of comparison, for example for a bed and breakfast property a basic value is applied to the number of bed spaces.

Fair Valuation

The VOA groups similar property categories in the same area together to make sure that they value them fairly and consistently. This is called a ‘valuation scheme’.

All properties in the same scheme will be given a value from the same value range. The VOA makes assumptions about these similar properties and if a property is different from these assumptions the VOA adjusts the property’s value accordingly.

Assets included in the valuation

The VOA will include certain business assets in their valuation. For example, plant and machinery may add value to a property and therefore certain types of plant and machinery are likely to be shown separately in a valuation.

How properties are measured

Dependant on how a property is being used the measurement method will vary, Net Internal Area combined with zoning is mainly used for retail and Gross Internal Area is used for warehouses and industrial plants.

Zoning

Zoning is a standard method of valuing and comparing retail premises. Shop or retail premises are divided into zones, starting from the window. Typically, each zone has a depth of 6.1 metres although this can vary depending on the location of the property.

Zones become less valuable the further they are from the window/entrance. Zone A, which is the closest, is the most valuable as it has the highest potential to generate business for the shop. Zone B is next, then Zone C. Anything after Zone C is usually defined as the remainder.

Survey method

The VOA uses standard measuring methods based on the Royal Institution of Chartered Surveyors (RICS) code of measuring practices.

This contains two common methods –

The net internal area (NIA) method of measurement is generally applied to:

  • offices
  • shops
  • other retail premises, such as banks, hairdressers, restaurants

The gross internal area (GIA) method of measurement is generally applied to industrial property such as warehouses or manufacturing units.

How premises with multiple occupancy are handled

In many cases, a commercial location may have multiple occupants such as an office above a shop. In these cases, the VOA will need to group the individual areas to create a rateable value for a location. These areas are referred to as Hereditaments.

Business Rates Hereditaments

When the Valuation Office Agency rates commercial premises it needs to know how many single and multiple hereditaments there are.

To ensure a property is correctly rated, it is important to know how many parts of the property need to be separately rated (or how many ‘hereditaments’ there are). If the property has only one occupier and all parts are contiguous (which generally means touching in some way) to one another or if over consecutive storeys the parts are contiguous by means of the floor of one lying directly above the ceiling of the other, this will normally be a single hereditament.

Buildings which have more than one occupier, and where the parts in the same occupation are not contiguous because they are separated by other occupations or shared areas such as stairwells and corridors, are treated as multiple hereditaments. This will also apply to car parking areas if they are separated from the building by shared areas.

Essentially, a property which comprises multiple buildings is classed as a single hereditament if the properties are occupied by the same person or organisation and are contiguous to one another (an exception will be where one part is used for an entirely different purpose from which the other is used).

Business Rates Plant and Machinery

In addition to the size of a property and it’s location and use, the Valuation Office Agency may also consider other items when calculating a rateable value.

Examples (and how they are relevant to the valuation) may include:

Shops

  • Air conditioning / air handling (floor area served by system (sq m))
  • CCTV security system (only if 4 or more cameras)
  • Fire protection / detection / alarm / suppression (area covered by sprinkler system (sq m))
  • Lifts (floors served and capacity, whether goods or passenger)
  • Renewable energy items (presence of solar panels / wind turbine, and their generating capacity in kilo Watts (kW))
  • Cold stores (whether built in or free standing as well as gross floor area)
  • Uninterruptible power supply / standby generator (size of generator in kilo Volt Amps (kVA))

Offices

  • Air conditioning / air handling (floor area served by system (sq m))
  • CCTV security system (only if 4 or more cameras)
  • Fire protection / detection / alarm / suppression (area covered by sprinkler system (sq m))
  • Lifts (floors served and capacity, whether goods or personnel)
  • Renewable energy items (presence of solar panels / wind turbine, and their generating capacity in kilo Watts (kW))
  • Uninterruptible power supply / standby generator (size of generator in Kilo Volt Amps (kVA))

Industrial

  • Air conditioning / air handling (floor area served by system (sq m))
  • CCTV security system (only if 4 or more cameras)
  • Fire protection / detection / alarm / suppression (area covered by sprinkler system (sq m))
  • Lifts (floors served and capacity, whether goods or personnel)
  • Air compressors (whether screw or piston). Free air flow capacity in cubic metres per hour, or cubic feet per minute. (CMH / CFM)
  • Renewable energy items (presence of solar panels / wind turbine, and their generating capacity in kilo Watts (kW))
  • Cold stores (whether built in or free standing and gross floor area)
  • Uninterruptible power supply / standby generator (size of generator in Kilo Volt Amps (kVA))

Business Rate Exemptions

Government Guidelines allow certain properties to be exempt from business rates based on their use or status. These fit under two groups, Exempted Buildings and Empty Properties.

Exempted buildings

Based on their use certain properties may be exempted from business rates by the Valuation Office Agency, these include:

  • Agricultural land and buildings
  • Fish farms
  • Sewers and property of drainage properties
  • Public parks
  • buildings or parts of buildings, which cater for the needs of people with learning disabilities
  • buildings used for training or welfare of disabled people
  • buildings registered for public religious worship or church halls

However, there are strict legal requirements for these exemptions. A property that is exempt may not have been given a rateable value by the Valuation Office Agency. Properties not included in the Valuation List will not be charged for business rates whether they are being used or not.

Empty properties

Business rates do not beed to be paid on buildings which have been empty for 3 months. After this time, most businesses must pay full business rates.

Some properties can get extended empty property relief:

  • industrial premises (for example warehouses) are exempt for a further 3 months
  • listed buildings – until they’re reoccupied
  • buildings with a rateable value under £2,900 – until they’re reoccupied
  • properties owned by charities – only if the property’s next use will be mostly for charitable purposes
  • community amateur sports clubs buildings – only if the next use will be mostly as a sports club

The logic behind the 3 month limit is to bring vacant shops, offices, factories and warehouses back into use. The idea is to encourage owners to re-let, redevelop or sell unused property; improving access to premises and reducing rents for businesses, as well as reducing the need for development on greenfield land.

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