Flexible office operators will be one of the biggest losers of former chancellor Rachel Reeves’ business rates changes, which have sent shockwaves across business models. With flex offices up and down the country potentially on the brink of closure, it is one of the most important structural changes that operators have faced in recent years.

The tax shake-up means operators could face backdated bills from 2023 amounting to an extra charge totalling around £594m a year across the sector, because of the way HMRC now classifies shared office buildings. This, in turn, creates a disproportionate cost increase compared with traditional office buildings, severely affecting operators’ profitability as flexible workspace becomes less affordable, and in some instances they face no choice but to pack up and leave. The shift is monumental.

Coinciding with this hike, the revaluation is now being compounded by the Valuation Office Agency (VOA) increasingly taking the view that many managed workspace buildings should be treated as a single hereditament. Up to now, flex workspaces worked partly because vacant offices often had empty rates relief, small tenants were eligible for small business rate relief and operator risk was mitigated.

Now, under aggregation, empty flex office space will be fully rateable and if a multi-demised building is occupied by a single tenant, it is deemed fully occupied and therefore no longer qualifies for small business rate relief. The latter change is one of the biggest blows to the industry.

Of course, many existing management agreements and leases entered into by flexible workspace operators are likely to have pricing determined according to the business rates regime that existed before these changes were made by the VOA, meaning that now, thousands of operators have been blindsided by significant extra costs.

Occupiers may take less space or employ fewer people, reducing the footfall that supports high streets

One such example is London flexible office operator The Fisheries, which was recently issued a backdated business rates bill of around £500,000, with its rates bill this year doubling from £12,000 a month to £24,000. As a result, the operator has been granted a judicial review in a case that is the first legal test of the new flex office business rates rules by the industry.

Meanwhile, more than 60 operators have already written to the chancellor identifying the threat caused by rising rates costs, reduced investment and centre closures.

Out of office: new rules hiking business rates on flexible offices may force some operators to shut up shop
Credit: Shutterstock / Jordi Mora

Impact on high streets

The impact of the business rate changes for flexible office operators will also have a wider ripple effect. As Lauren Edwards, MP for Rochester and Strood, recently said during Prime Minister’s Questions in the House of Commons, the business rates changes could have a significant effect on high streets. If operators are forced to pass costs on through higher desk rates, occupancy levels could fall, with profound consequences for businesses in the surrounding area.

Occupiers may take less space or even employ fewer people, reducing the footfall that supports the urban high street and the businesses that depend on office workers, such as hospitality and retail. This could have a devastating outcome, as SMEs often rely on flexible workspaces at a crucial stage in their growth.

This raises the fundamental question of whether tax systems are keeping pace with new and evolving ways of working – a critical consideration for the new prime minister if he is to be considered pro-business growth.

One solution could be to introduce a rates holiday for flex office operators in their first year of occupation, followed by a tapered increase for each subsequent year. This would have the twin effect not only of supporting flexible offices and their SME occupiers, but the high street and local businesses, too.

The key question isn’t just what is the rateable value, but will the VOA treat this as one property or many? That single decision can make a flex scheme viable or wipe out its margin entirely, potentially leaving buildings empty as operators – especially smaller ones – may have to walk away due to the financial burden.