Subletting to Avoid Business Rates: A Comprehensive Guide
For businesses, business rates—a tax levied on non-domestic properties—can represent a significant financial burden. While some businesses explore ways to reduce this liability, including subletting part of their premises, it’s important to understand how business rates work and the rules surrounding subletting.
This guide will explain what business rates are, how subletting can affect them, and what legal and practical considerations you need to bear in mind if you’re considering subletting to reduce your business rates liability.
Business rates are a tax on properties used for non-domestic purposes, including offices, shops, warehouses, and factories. They are set by the government and collected by local councils. The amount payable depends on the property’s rateable value, which is calculated based on its estimated rental value on the open market. Businesses may also benefit from rate relief schemes depending on the size of the property or its location.
The government periodically reassesses rateable values, and businesses are charged accordingly. Even if you don’t occupy the entire property, you may still be responsible for business rates unless special arrangements, like subletting or sharing space, are made.
When a business sublets part of its property to another tenant, the liability for business rates can change depending on the arrangement. Subletting can offer an opportunity to share costs, including rent and business rates, but there are specific rules that determine how rates are calculated when subletting is involved.
When a part of a property is sublet, it often becomes the responsibility of the new tenant (the subtenant) to pay the business rates for the part of the property they occupy. In such cases, the landlord (main tenant) can effectively reduce their own liability by passing the cost to the subtenant.
However, the following must occur:
If the property or sublet area is not considered self-contained, the original tenant (the landlord in the sublet agreement) may still be responsible for the entire property’s business rates. In such cases, the landlord may agree to charge the subtenant an amount that covers their portion of the business rates liability as part of the rental agreement.
If the property’s rateable value is below a certain threshold, small businesses may qualify for Small Business Rate Relief (SBRR), which can significantly reduce or even eliminate business rates. When subletting a small property, the relief could be lost if the property no longer qualifies as a single unit under the relief scheme. Thus, businesses subletting need to ensure they still meet the criteria for SBRR.
Subletting part of your property to avoid or share business rates liability requires careful legal and practical planning. Here are some key considerations:
Before considering subletting, it’s essential to check the terms of your lease. Many commercial leases include restrictions or requirements regarding subletting. Some leases:
It’s crucial to ensure that your lease allows subletting or to negotiate the terms with your landlord if it does not.
If you sublet part of your premises, you’ll need to ensure that the sublet portion has a separate rateable value for business rates purposes. This typically involves:
This is important because if the VOA does not assess the property as two separate spaces, you may remain liable for business rates for the entire property, even if you’ve sublet part of it.
When drafting a sublease, ensure it clearly outlines who is responsible for paying business rates. If the subtenant is to cover their portion of the rates, this should be included in the rental agreement.
Ensure the subtenant understands their liability and that they take responsibility for paying their rates directly to the local authority (if the area is separately assessed). Alternatively, if the subtenant’s rates are included in the rent, this should be stated in the sublease agreement.
Many leases require you to obtain landlord consent before subletting. Failing to secure landlord permission can lead to legal complications and potential lease violations, which could result in penalties or termination of the lease.
When seeking consent, present the landlord with clear information about the subtenant, their business, and the impact (if any) on the premises. Be prepared to negotiate terms to accommodate the subtenant.
Subletting may also have tax implications for both you and your subtenant. Income from subletting is generally taxable, and you may need to declare it on your tax return. Additionally, if your subtenant is a business, VAT may apply to the rent and services provided.
Subletting to reduce or avoid business rates can be an effective strategy, but there are some risks involved, including:
Subletting can help businesses reduce their business rates liability, especially if part of the premises is sublet as a separate, self-contained unit. However, it’s essential to approach subletting carefully, ensuring compliance with your lease terms, securing landlord approval, and having the property reassessed for rates purposes.
Fraser Bond can offer expert advice on subletting and business rates reduction, ensuring you take the right steps to optimise your commercial property costs. Contact us today to learn how we can assist you in navigating the complexities of subletting and business rates management.
