How are Business Rates Calculated?

At Towerstone Accountants we provide specialist property accountant services for property owners business owners and individuals dealing with property related taxes across the UK. This article has been written to explain how are business rates calculated in clear practical terms so you can understand how the rules apply in real situations. Our aim is to help you stay compliant reduce uncertainty and know when professional advice is needed.

Business rates are one of the most misunderstood taxes in the UK. I regularly speak to business owners who know how much they pay each month but have no idea how the figure was arrived at or whether it is even correct. Others assume business rates are arbitrary or set by the council without any clear logic. In reality business rates follow a defined calculation process set at national level with local collection and limited local discretion.

Understanding how business rates are calculated matters because it affects cash flow budgeting appeals and eligibility for reliefs. If you do not understand the mechanics it is very easy to assume you have no control when in fact you may be entitled to reductions or even refunds.

In this guide I will explain clearly how business rates are calculated in England what the key components are how rateable value is determined how the final bill is worked out and what can change the amount you pay. This is written in plain UK English with practical explanations rather than legislation heavy language.

What Are Business Rates?

Business rates are a tax charged on most non domestic properties. They are the commercial equivalent of council tax.

They apply to properties such as:

Shops

Offices

Warehouses

Factories

Pubs and restaurants

Salons and clinics

Industrial units

If a property is used for business purposes it will usually attract business rates unless a specific exemption applies.

Business rates are set nationally and collected locally. The rules for calculation are consistent across England although reliefs can vary slightly by council.

The Two Core Parts of the Calculation

Business rates are calculated using two main components:

The rateable value of the property

The business rates multiplier

Once you understand these two elements the calculation itself is straightforward.

What Is Rateable Value?

Rateable value is the starting point for all business rates calculations.

It is an estimate of the annual rent the property could have been let for on the open market at a specific valuation date.

It is not:

Your actual rent

Your turnover

Your profit

It is a hypothetical rental value set by the Valuation Office Agency.

The Valuation Office Agency is part of HM Revenue & Customs and is responsible for assessing rateable values across England and Wales.

The Valuation Date

Rateable values are based on a fixed valuation date not current market conditions.

The current rating list in England is based on rental values as at 1 April 2021 even though bills apply from later years.

This means:

Your rateable value does not change every year

Market changes do not immediately affect your bill

Revaluations happen periodically not continuously

This is why business rates can feel out of step with current rents especially during periods of rapid market change.

How the Rateable Value Is Assessed

The Valuation Office Agency assesses rateable value using different methods depending on the type of property.

For most standard commercial properties such as shops and offices the comparison method is used.

This involves looking at:

Comparable rental evidence

Location

Size and layout

Use of the property

For more specialised properties such as pubs or hotels a receipts and expenditure method may be used which looks at trading potential.

For properties that are rarely let such as factories or power stations a contractor’s method may be used based on construction cost and depreciation.

Rateable Value Is Not the Same as Market Value

This distinction is critical.

Market value is what a property might sell for.

Rateable value is what it might rent for annually at the valuation date.

A property worth £500,000 to buy might have a rateable value of £30,000 or £50,000 depending on the market.

Confusing these two figures leads many business owners to incorrect assumptions about their bill.

Checking Your Rateable Value

You can check the rateable value of your property on the government website.

This shows:

The current rateable value

The effective date

The description of the property

This is always the first place to start if you want to understand or challenge your business rates.

What Is the Business Rates Multiplier?

Once the rateable value is set the next step is applying the multiplier.

The multiplier is a pence in the pound figure set by the government each year.

There are usually two multipliers:

The standard multiplier

The small business multiplier

The small business multiplier applies to properties with lower rateable values and is slightly lower than the standard multiplier.

The exact multiplier changes each tax year and is published in advance.

How the Multiplier Works

The multiplier is applied to the rateable value to calculate the gross annual business rates bill before any reliefs.

The calculation is:

Rateable value × multiplier = annual business rates before reliefs

For example if a property has a rateable value of £20,000 and the multiplier is 0.499 the gross bill would be just under £10,000.

This figure is then adjusted for any reliefs or exemptions.

Why the Multiplier Changes

The multiplier is adjusted each year mainly in line with inflation.

This is one of the reasons business rates tend to rise annually even if your business circumstances have not changed.

Although revaluations reset rateable values periodically the multiplier ensures overall tax revenue remains broadly stable.

Small Business Rates Relief

Small Business Rates Relief is one of the most important reductions in the system.

It applies based on rateable value not turnover or profit.

How Small Business Rates Relief Works

If your property has a rateable value below a certain threshold you may qualify for relief.

At the lower end of the scale properties can receive:

100 percent relief meaning no business rates payable

As rateable value increases relief tapers away gradually until it disappears entirely above the upper threshold.

You usually need to apply for this relief through your local council.

Many eligible businesses miss out simply because they assume it is applied automatically.

Retail Hospitality and Leisure Relief

In recent years additional reliefs have been introduced for certain sectors.

Retail hospitality and leisure relief has applied to businesses such as:

Shops

Cafés

Restaurants

Pubs

Gyms

This relief reduces the bill by a percentage for eligible properties subject to annual caps.

Eligibility and availability can change each year so it is important to check what applies in the current tax year.

Other Common Business Rates Reliefs

There are several other reliefs that can reduce the bill.

These include relief for:

Charities

Rural businesses

Empty properties for a limited period

Part occupied properties

Hardship in exceptional cases

Each relief has its own criteria and application process.

Understanding what you may qualify for can significantly reduce costs.

Transitional Relief After Revaluations

When a revaluation happens rateable values can rise or fall significantly.

To prevent sudden large increases or decreases in bills transitional relief is applied.

This limits how much your bill can change year to year.

While this softens increases it can also delay reductions for businesses whose rateable value has fallen.

This is why some businesses do not see immediate savings after a revaluation.

How Local Councils Are Involved

Local councils do not set rateable values or multipliers.

Their role is to:

Issue bills

Collect business rates

Apply reliefs

Enforce payment

Councils keep a portion of the revenue and pass the rest to central government.

If you have a query about billing or reliefs you contact the council.

If you have a query about the rateable value itself you deal with the Valuation Office Agency.

How Business Rates Are Billed

Business rates are usually billed annually and payable in monthly instalments.

Your bill will show:

Rateable value

Multiplier applied

Gross charge

Reliefs applied

Net amount payable

Always check the bill carefully. Errors do occur particularly where properties have changed use or size.

What Happens If Your Property Changes

Certain changes can affect business rates.

These include:

Physical alterations to the property

Change of use

Splitting or merging units

Becoming vacant

Some changes affect rateable value and others affect eligibility for reliefs.

Not all changes take effect immediately due to the fixed valuation date system.

Challenging Your Business Rates

If you believe your rateable value is incorrect you can challenge it.

The current process is known as Check Challenge Appeal.

It involves:

Checking the factual details

Challenging the valuation

Appealing if necessary

This process can be time consuming but successful challenges can result in reduced bills and backdated refunds.

Professional advice can be useful especially for complex properties.

Common Reasons Rateable Values Are Wrong

In my experience common issues include:

Incorrect floor area

Wrong property description

Use assumptions that no longer apply

Valuations based on outdated evidence

Never assume the valuation is correct just because it comes from an official body.

Business Rates and Home Based Businesses

Not all home based businesses pay business rates.

If you use part of your home exclusively for business such as a salon or workshop it may be assessed for business rates.

If business use is minor or ancillary council tax usually continues to apply.

This is an area where individual assessment matters.

Business Rates vs Council Tax

A property cannot be subject to both council tax and business rates for the same space.

However mixed use properties can have:

Part assessed for business rates

Part assessed for council tax

This is common where someone lives above a shop or uses part of a home for business.

Why Business Rates Feel High

Business rates are based on property value not business performance.

This means:

Profitable and unprofitable businesses pay the same for similar properties

Rates do not adjust if trade falls

Fixed costs can become burdensome

This is why business rates are often criticised particularly by small businesses.

Planning Ahead for Business Rates

The most effective way to manage business rates is planning rather than reacting.

This includes:

Checking rateable value when taking a lease

Factoring rates into affordability

Applying for reliefs early

Monitoring revaluations

Too many businesses only engage with rates when they cannot afford the bill.

When Professional Help Is Worthwhile

Professional rating surveyors can help where:

Rateable value is high

Property is unusual

Bills are significant

Reliefs are complex

Fees are often success based but always check terms carefully.

Final Practical Example

To bring this together consider a small shop with a rateable value of £18,000.

The small business multiplier applies. The gross bill is calculated by multiplying £18,000 by the multiplier. Small business rates relief may then reduce that bill significantly or even eliminate it entirely depending on thresholds.

The same shop in a different location with a rateable value of £30,000 would face a much higher bill even if turnover were identical.

So How Are Business Rates Calculated?

Business rates are calculated by taking the rateable value of a non domestic property and multiplying it by a government set multiplier. This produces a gross annual charge which is then reduced by any applicable reliefs.

The rateable value is an estimate of annual rental value at a fixed valuation date set by the Valuation Office Agency. The multiplier is set nationally each year. Local councils bill and collect the rates and apply reliefs.

Understanding this process allows business owners to check bills challenge incorrect valuations and plan more effectively. Business rates may be unavoidable but overpaying due to misunderstanding or inaction is not.

If you want to explore this topic further you may also find our guidance on what are business rates and do i qualify for small business rate relief helpful. For a wider view of how business rates work reporting obligations and available reliefs you can visit our business rates hub which brings all related guidance together.