In a post-Brexit, post-Covid world, providing affordable and interesting workspaces is crucial to ensuring that London is at the forefront of the tech and creative industries and, therefore, a draw for national and international talent. However, as referenced in the BCO report Affordable workspace: A solution: not a problem – rents have escalated over the years, and the cheaper fringe locations, which have historically been home to the creative sectors, have been those that have seen the fastest increases in rent.

The City core saw rents increase by 29% over the last ten years, with the fringe witnessing a huge 50% growth. Subsequently, the gap between the core and fringe has closed. Ten years ago, there was a 19% gap between average core and fringe rents, and by the first half of 2022, this gap is non-existent.

Although the new London Plan is giving greater significance to the importance of affordable workspaces and the need to provide for them in the planning process – a positive step for SMEs – often operators can’t afford to take on the footprint in new buildings, even with reduced rents, due to the sizeable cost associated with business rates.

The rent reduction is therefore not enough to offset the increased costs associated with occupying a new building. Small businesses that use affordable workspaces are at a disadvantage compared with those businesses that use traditional buildings or serviced offices as the rates valuations continue to reflect full market rental levels and there is no access to relief, such as small business rates relief. This creates a barrier for these types of operators to create more affordable open workspaces. These types of space are likely to be further disproportionately impacted due to the forthcoming 2023 business rates revaluation, particularly in the historically ‘fringe’ locations.

Business rates are not working for London’s affordable workspaces

Business rates are clearly an issue affecting the financial viability of affordable workspace in London. There has historically been very little understanding of how business rates work in general due to the complexities of the system and their lack of adaptability to providers and their occupiers.

A consistent theme is the impact that the tax has on operating costs for businesses. Due to the way in which business rates are valued, there is no differential between affordable and traditional offices from a rates valuation perspective (even if the rent has been subsidised to provide affordable workspace – as per the London Plan). Therefore, although affordable workspace can be created via reduced rents, the business rates could negate any material benefit – something which has become even starker due to the continued growth of the tax, particularly in those areas where affordable spaces are required the most.

The current business rates relief system also does little to support affordable workspace. At present, the only rates relief mechanism available to ‘small businesses’ applies to those that occupy self-contained units capable of being separately valued and falling under a Rateable Value threshold of £15k. After the 2023 revaluation, this will, in many central London areas, only benefit those occupying less than 205 sq ft of self-contained space with no benefit for open-plan or shared areas.

The small business relief system also has no means test and does not therefore always benefit those that actually need the relief. Without some degree of means testing either directly or indirectly the rigid nature of the current rates relief schemes for small businesses have no application when looking at supporting affordable workspace.

Based on our data, affordable workspaces in London are likely to be disproportionately impacted by the forthcoming rates revaluation. Since 2010, business rates in fringe areas have more than doubled, and April’s 2023 revaluation is predicted to see further rises of between 16% and 29% in some of London’s fringe areas such as Farringdon, Southwark and Camden, making these areas, which once housed innovation and creativity, too expensive.

In fact, not only has the rates per sq ft more than doubled in Farringdon since 2010 (£11.15 psf to £23.78 psf) the gap between the core and fringe has closed considerably since 2010, where there was a 45% gap between Farringdon and the City core. This gap currently stands at 16%, which we predict will continue to close and even potentially disappear after April.

The current business rates system therefore penalises providers that share workspace flexibly. The system incentivises subdivision into individual offices rather than providing open spaces, which are not always practical, preferable, or affordable for small businesses. The current rates system inhibits the development of open-plan offices, increasing the cost to users, with providers having to either operate as a charity (therefore benefiting from at least 80% charitable rates relief) or absorb business rates based on full open market rental levels.

There are clear benefits for encouraging affordable workspace, and with local authorities starting to include policy within their Local Plans, together with thresholds and requirements for developers, the lack of any dedicated support for the rising cost of business rates could impact the viability of such schemes moving forward.

It is acknowledged that the recent impact of Covid-19 and the somewhat stalled nature of the rates retention pilots have impacted the scope for central government and local authorities to provide yet more rates relief. However, if affordable workspace schemes are to be promoted and succeed, targeted rates relief should be a key part of local authorities’ strategy for their implementation.

The business rates system is undergoing a series of reforms following last year’s fundamental review, and although we would not advocate for more complexity to be added to an already complex system, we do believe that targeted rates relief to assist those that will benefit from it most and, in turn, provide wider community benefits, should be a key part of ongoing reform. The proposed reforms to digitise the system and link rates in with businesses’ wider tax landscape could be a mechanism to allow for this.

In the short term, local authorities could utilise their discretionary powers to provide rates relief with the costs then being reimbursed by central government, a route which has been used frequently over recent years as a means of delivering targeted rates relief without the need for any new legislation.

In the longer term, the wider benefits of supporting affordable workspace schemes will arguably exceed the financial support awarded through the business rates system. It is therefore essential that there is collaboration between all parties involved in the delivery and operation of affordable workspace to ensure their full potential and benefits are realised.

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