(Updated on 30 November to add comment from the VOA at the bottom.)
The Valuation Office Agency is meeting rating agents from the country's biggest property consultancies on Wednesday (30 November) to discuss a recent change in business rates that could have massive financial ramifications for serviced office operators, CoStar News can reveal.
Under the change, serviced office operators such as WeWork and Regus owner IWG, could be landed with business rate bills instead of their tenants, said five sources familiar with the situation. A small business in a serviced office will no longer be viewed as the occupier of the building and the operator of the serviced office space would have to pick up the business rates bill. The change, driven by local councils seeking extra sources of income, will only affect operators in Central London at first, but the expectation is that the new rule will be applied to operators across the country eventually. The new rule could also be backdated to 2017 as part of the plans, which would see operators being charged for six years of historic business rates.
The change has been likened to the VOA’s controversial decision to backdate business rates bills for occupiers at UK ports in 2008, which which the government blocked in 2010 by introducing an immediate halt to the “ports tax”.
Robert Hayton, UK president at the real estate adviser Altus Group, which is not attending the meeting, said: “There are four key ingredients to rateable occupation for these types of properties with the law being established as long ago as 1936 through the Southern Railway [Westminster City Council v Southern Railway] case. To reverse and/or backdate current policy on these types of properties is clearly outside the spirit of fairness. Ultimately, any additional costs are likely to be borne by small business. Let’s hope this is not a similar policy shift like with the ports over a decade ago." Hayton added: "That ended with government stepping in and refunding backdated bills that couldn’t have been reasonably foreseen or planned for.”
Operators of flexible office space typically sign long leases with the landlord for the whole property. They then charge occupiers of the space on a per workstation basis for a shorter term typically with options to buy packages of services.
A small business may have been eligible for the business rate relief offered by government, but not the serviced office operator if the overall business is profitable.
The change has taken the industry by surprise. It was not mentioned during the Autumn Statement on 17 November, when the Chancellor of the Exchequer, Jeremy Hunt, unveiled a package worth £13.6 billion to help business rates payers, as reported.
A spokesperson for the VOA said in a statement: "When valuing serviced offices, each property is considered according to its own facts, including its features and layout, and the contractual terms under which it is occupied. Recent legal judgements in the Cardtronics UK Ltd and Ludgate House cases have given reason for the VOA to consider units of assessment for serviced offices. We decide whether a serviced office is treated as one or more units of assessment in line with the law. We regularly update our Rating Manual to reflect the latest legal position. We meet with agents on a regular basis to discuss a range of valuation matters."