This quick guide provides a deep dive into business rates, service charges and dilapidations. A good understanding of these concepts will help ensure a smooth transition to the UK and promote the success of your business.
Property Law Tips for businesses moving to the UK
What Are Business Rates?
Business rates are a tax on the occupation of non-domestic properties, such as shops, offices, warehouses, and factories. They are charged to help pay for local services.
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Why is an understanding of business rates important?
- Financial Planning: Business rates can be a significant and often unexpected expense for businesses. Knowing the costs associated with business rates helps businesses plan their finances accurately. These charges can be significant and impact overall profitability.
- Legal Compliance: Failure to pay business rates on time can result in financial penalties and legal action being taken by the local authority against the business. Understanding these obligations helps them stay compliant and avoid unnecessary costs.
- Strategic Decision Making: Business rates vary by location. Understanding these differences can influence decisions on where to set up operations to optimise costs. Further, knowing about potential reliefs and the process for appealing business rates can result in significant savings as explained in more detail below.
How Are Business Rates Calculated?
- Rateable Value: This is an estimate of the property’s annual rent if it were available on the open market at a fixed valuation date. The Valuation Office Agency (VOA) determines this value.
- Multiplier: The rateable value is multiplied by a ‘multiplier’ set by the government. There are two types of multiplies. For properties with a rateable value of £51,000 or more, the standard multiplier is used. For properties below the threshold of £51,000, a small business multiplier applies.
- Relief: Deduct any business rate relief that you’re entitled to (see below).
You can find more information on the calculation at https://www.gov.uk/calculate-your-business-rates.
Reliefs and Exemptions
- Small Business Rate Relief: Available for properties with a rateable value below £15,000. Properties with a rateable value of £12,000 or less receive 100% relief, while those between £12,001 and £15,000 receive tapered relief. This relief can significantly reduce the amount payable.
- Retail, Hospitality, and Leisure Relief: For the 2024/25 tax year, eligible properties in these sectors can receive a 75% discount on their business rates, up to a cash cap limit of £110,000 per business.
- Rural Rate Relief: For businesses in rural areas with a population below 3,000, provided the businesses also satisfy other qualifying criteria (e.g. being the only type of business in the area).
- Charitable Rate Relief: Charities can get up to 80% relief, provided the property is mainly used for charitable purposes.
- Empty Property Relief: Properties that are unoccupied may be exempt from business rates for a period of three months. There are certain properties which can obtain extended empty property relief (e.g. industrial buildings, listed buildings, properties owned by charities).
Billing and Payments
Local councils send out business rates bills in February or March each year for the following tax year. Payments are usually made in 10 monthly instalments.
Revaluation and Appeals
The VOA periodically reassesses and updates the rateable values of all business properties to reflect changes in the property market. The most recent revaluation came into effect on 1 April 2023. If you believe your rateable value is incorrect, you can appeal to the VOA. However, it is advisable to seek professional advice before doing so
What are Service Charges?
Service charges are additional ‘rent’ that tenants pay to landlords in the UK, typically in commercial property leases. These charges cover the expenses incurred by the landlord’ in managing insuring, maintaining, and repairing shared areas and facilities in multi-let building.
Components of Service Charges:
Service charges can include costs for:
- Insurance: the Landlord is typically responsible for insuring the building within which the tenant occupies a floor or separate part.
- Maintenance and Repairs: Upkeep of common areas, such as lobbies, corridors, and external areas.
- Utilities: Shared utility costs, including electricity, water, and heating for common areas.
- Cleaning and Security: Services for cleaning common areas and providing security measures.
- Management Fees: Fees for the management of the property, including administrative costs.
Calculation Methods
The process for calculating the service charge payable by the tenant in respect of its occupation of the premises will be set out in the Lease. It is often a specific percentage of the total costs incurred by the Landlord which has been calculated by reference to the floorspace which the tenant occupies within the building: The specifics of service charges, including what is covered and how they are calculated, are detailed in the lease agreement. It’s crucial to review these terms carefully before signing a lease.
Best Practices
- Review Lease Terms: Understand the service charge provisions in your lease agreement.
- Budgeting: Factor in service charges when budgeting for your business expenses.
- Seek Professional Advice: Consult with legal professionals to ensure you fully understand your obligations and rights regarding service charges.
Dilapidations:
What Are Dilapidations?
Dilapidations refer to the state of disrepair or damage to a property that a tenant is responsible for rectifying, either during or at the end of a lease. They typically describe the necessary repairs and maintenance that a tenant must undertake to restore the property to its original condition, as stipulated in the lease agreement.
Why is an understanding of Dilapidations important?
- Financial Implications: These costs can be significant, and knowing about them helps businesses budget accordingly. If a business is unaware of its dilapidation obligations, it might face unexpected and potentially large bills at the end of the lease term.
- Legal Compliance: Most commercial leases in the UK include clauses about maintaining the property. Understanding these obligations helps businesses comply with the lease terms and avoid legal disputes. Further, knowing about dilapidations can help businesses prepare for and manage any disputes with landlords over the condition of the property.
- Strategic Decision Making: Awareness of dilapidation responsibilities can influence decisions about property alterations and maintenance during the lease term helping minimise future liabilities. Understanding dilapidations can also be beneficial during lease negotiations as businesses can negotiate terms that are more favourable or seek to limit their dilapidation liabilities.
Types of Dilapidations
There are three main types of dilapidations, each corresponding to different stages of a lease:
- Interim Dilapidations: this schedule is issued during the lease term by the Landlord to address and remind the tenant of their ongoing maintenance obligations.
- Terminal Dilapidations: this schedule is issued by the Landlord toward the end of the lease (typically within the last 36 to 18 months) detailing any repairs or restorations needed.
- Final Dilapidations: this schedule is issued by the Landlord after the lease has expired and will detail any outstanding repairs and maintenance that the tenant must address to restore the property to its original condition.
Best Practices
- Document condition of Property at start of the Lease: it provides a detailed record of the property’s condition at the start of the lease, which helps establish a clear baseline for assessing any changes or damages over time.
- Understand Lease obligations: familiarize yourself with the specific repair and maintenance obligations outlined in the lease agreement. This ensures both parties know their responsibilities.
- Regular Maintenance: Conduct regular maintenance to avoid significant dilapidations at the end of the lease.
- Professional Advice: Engage with legal professionals to understand your obligations and manage dilapidations effectively. The expertise of a qualified surveyor can help in accurately identifying and costing necessary repairs.
- Negotiation: Approach dilapidations discussions with a willingness to negotiate and reach a fair settlement. This can save time, costs, and maintain a positive relationship between landlord and tenant.
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