Who Pays Business Rates?

Business rates, sometimes called non-domestic rates, are a significant cost for those occupying commercial premises in the UK. They are a tax on the use of non-domestic property and are payable in addition to rent and other occupational costs.

Understanding who pays business rates is crucial for both landlords and tenants, as liability depends on occupation, lease terms, and specific circumstances such as vacancy or reliefs.

The General Rule: The Occupier Pays

In most cases, the occupier of the property pays business rates. This is usually the tenant if the property is leased. Occupation is determined by actual use and control of the property. For example:

• A retail tenant trading from a shop will be liable.
• An office tenant in occupation will be liable.
• A warehouse operator storing goods is liable.

The occupier must register with the local authority, which issues the business rates bill. These bills are calculated based on the property’s rateable value assessed by the Valuation Office Agency (VOA) and the multiplier set annually by central government.

If there is more than one occupier, liability is apportioned according to the occupation. For instance, in a serviced office, each occupier may be billed separately, while in a shared warehouse, the landlord may pay and recharge tenants.

When the Lease Alters the Default Rule

Although the general principle is that the occupier pays, lease terms can vary from this arrangement. For example:

• The landlord may agree to pay business rates and then recover the cost from tenants as part of a service charge or rent-inclusive arrangement.
• In some shopping centres, landlords pay the rates for all units and pass them on to tenants to simplify administration.
• For short-term pop-up arrangements, landlords may retain responsibility and absorb the liability themselves.

This means tenants should always review lease terms carefully to confirm whether they or the landlord are liable for business rates. Clauses in leases can shift responsibility and significantly affect the overall cost of occupation.

Empty Properties: Who Pays?

When a commercial property is empty, the position changes. Empty business rates liability usually falls on the owner of the property, not the tenant, unless the tenant remains contractually responsible under the lease.

Key points on empty property liability:

• Most empty properties receive a 3-month exemption from business rates (6 months for industrial properties).
• After this relief, the owner becomes liable for full rates.
• Certain exemptions may apply, such as listed buildings, properties with very low rateable values, or those occupied by charities when in use.

Landlords often face difficult decisions when properties fall vacant, as they may become liable for substantial business rates after the relief period expires.

Short-Term Occupation and Mitigation

To reduce empty rates liability, landlords sometimes grant short-term leases or licences to tenants. Even a temporary occupation can reset the empty rates relief period once the property becomes vacant again.

For example, a landlord might allow a charity or small business to occupy premises at a reduced rent. This benefits both sides: the occupier gains space at low cost, while the landlord avoids full empty rates liability.

However, local authorities scrutinise arrangements carefully to ensure they are genuine and not simply tax avoidance schemes.

Business Rates and Sub-Tenants

Where a property is sublet, liability usually follows actual occupation. If the sub-tenant is in physical occupation, they will generally be responsible for paying business rates.

However, if the property is vacant or the sub-tenant leaves, the head tenant or landlord may become liable again.

This underlines the importance of lease drafting. Many headleases require tenants to indemnify landlords against rates liability, even if a sub-tenant defaults.

Business Rates Reliefs and Exemptions

Business rates can be reduced or eliminated through reliefs. Occupiers and owners should always check what reliefs apply:

• Small Business Rate Relief (SBRR): For properties with lower rateable values, it is often available where the occupier only uses one property.
• Charitable Rate Relief: Charities occupying premises for charitable purposes can receive relief of up to 80%, with some councils granting further discretionary relief.
• Rural Rate Relief: For qualifying properties in small rural communities.
• Enterprise Zones and Local Reliefs: In some areas, local authorities provide targeted reliefs to encourage business growth.

These reliefs can significantly reduce liability, but they must be applied for and justified with evidence.

The Landlord’s Position

While tenants usually bear the liability, landlords remain exposed in several situations:

• Vacant possession: Landlords become liable once the relief period expires.
• Insolvent tenants: If tenants default or become insolvent, landlords may indirectly bear costs through lost recovery of recharged rates.
• Inclusive rents: If the lease specifies that rent includes business rates, the landlord must pay regardless of the tenant’s solvency.

Landlords, therefore, need to plan, factor business rates into investment decisions, and draft leases carefully to protect their position.

The Tenant’s Position

For tenants, business rates are often their second most considerable occupational cost after rent. They should:

• Check the VOA’s rateable value and consider appealing if it seems too high.
• Review lease terms to confirm responsibility.
• Apply for reliefs and exemptions where eligible.
• Budget for annual increases, as multipliers change each financial year.

Tenants should also be aware of transitional relief, which limits the rate of increase after a revaluation, smoothing sudden cost rises.

Special Cases

Certain situations create exceptions or complexities:

• Serviced Offices and Shared Spaces: Operators sometimes retain liability and incorporate rates into fees.
• Charitable Use: Charities benefit from significant reliefs, significantly reducing their liability.
• Seasonal Occupation: Businesses using properties only part of the year (e.g., holiday lets) may still be liable for the whole year unless reliefs apply.
• Home Businesses: If only part of a home is used for business, rates may not apply, unless it constitutes a separate non-domestic use.

Practical Guidance

For both landlords and tenants, a clear understanding and negotiation are essential:

• Before entering a lease, establish who will pay business rates.
• On vacancy, confirm whether liability shifts to the owner.
• On lease expiry, ensure proper handover to avoid unexpected charges.
• When financial difficulties arise, engage with the local authority early to explore payment plans or reliefs.

Because business rates are a significant and sometimes overlooked cost, misunderstandings can lead to disputes, arrears, and strained landlord–tenant relationships.

FAQs on Who Pays Business Rates

Do tenants always pay business rates?

Not always. Typically, the occupier pays, but the lease may specify that the landlord pays and recharges, or that rent is inclusive of rates.

If my shop is empty, do I still pay?

If you are the owner, yes – after the relief period (3 months for most properties, 6 months for industrial). Tenants who have handed back possession are usually not liable unless the lease says otherwise.

Can business rates be reduced?

Yes. Slight Business Rate Relief, charitable relief, rural relief, and transitional relief may apply. Always check with your local council.

If I share a building with other tenants, who pays?

Liability depends on who is in physical occupation of each part. Sometimes, landlords pay and pass on the cost through service charges.

What happens if my tenant goes bankrupt?

If the tenant has business rates liability and becomes insolvent, the landlord may not be liable directly but may still lose income if the tenant fails to reimburse recharged rates. If the property becomes vacant, liability usually reverts to the landlord.

Do landlords benefit from any exemptions?

Yes. Empty property relief, listed building exemptions, and low-value property exemptions may apply.

Conclusion

In summary, who pays business rates depends primarily on occupation, but lease terms and circumstances can shift liability. Usually, the tenant pays, but landlords may become liable if premises are empty or leases allocate responsibility differently.

Reliefs and exemptions can ease the burden, but both landlords and tenants must remain proactive to avoid unexpected costs.

Business rates remain a key financial consideration in commercial property occupation. For tenants, they represent a significant ongoing cost. For landlords, they can become an unwelcome liability during vacancies.

The best protection lies in precise lease drafting, diligent application for reliefs, and a solid understanding of the legal framework.

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Useful External Links

https://www.gov.uk/introduction-to-business-rates

https://www.gov.uk/apply-for-business-rate-relief

https://www.rics.org/profession-standards/rics-standards-and-guidance/business-rates