Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
The U.K.’s evolving business rates regime is colliding with a uniquely large and sophisticated flexible office sector, creating a significant tax shock for coworking, serviced and managed office operators.
Two developments in particular – the recent shift in Valuation Office Agency (VOA) practice and a move to higher, more graduated multipliers for larger properties – threaten to raise effective occupancy costs sharply and to unwind some of the economic advantages that have driven the rapid growth of flexspace.
Background: the U.K. flexspace boom
The U.K. has one of the most developed flexible office markets in the world, with London regularly cited as the largest single city market for coworking and serviced offices outside the United States. Industry analysts estimate that flexible workspace in key U.K. cities can account for around 10–15 percent of total office stock by number of buildings or centres, versus mid‑single‑digit percentages in many continental European markets.
Market reports put the U.K. flexible office sector at around US$3.5–3.8 billion of annual revenue in 2024–2025, with coworking making up just over half of that, and London alone representing roughly three‑quarters of national flex inventory.
Enquiries for flexible space are more than double pre‑pandemic levels and providers report rising demand from larger corporates, not just start‑ups and freelancers, confirming that flexspace has become a core part of corporate real estate strategy rather than a peripheral niche.
Why U.K. occupiers moved to flexspace
A key structural driver of this shift lies in the traditional U.K. office lease, which has historically combined three features that make conventional space both expensive and inflexible for occupiers.
- First, office leases have typically been on a triple‑net basis, with tenants bearing liability for repair, insurance and non‑domestic rates on top of headline rent, transferring a large share of operational risk from landlord to occupier.
- Secondly, lease terms of ten years or more have been common, with only a mid‑term break in some cases, locking businesses into long commitments that sit uneasily with modern, volatile headcount planning.
- Thirdly, upward‑only rent reviews – generally every five years – have meant that rents could ratchet higher in rising markets but rarely fall in line with softer conditions, so that legacy leases often sit above current market levels.
Against this backdrop, coworking and serviced offices offered shorter commitments, bundled services and the ability to scale space up or down, while still providing high‑quality environments in prime locations.
For many occupiers, particularly SMEs and project‑based teams, the ability to avoid long, triple‑net obligations and to treat occupancy costs as more variable, an “all‑in” service charge has been compelling, accelerating the migration from conventional leases to flexspace.
How business rates work
Business rates are the U.K.’s main property tax on non‑domestic buildings, including offices, shops and industrial premises, and they are payable in principle whether the occupier is a traditional tenant or a flexspace operator.
Each hereditament (rateable unit) is assigned a “rateable value” (RV) intended to approximate its annual open‑market rental value at a specified valuation date, determined by the Valuation Office Agency in England and Wales or the equivalent bodies in Scotland and Northern Ireland.
Annual liability is calculated by multiplying the RV by a “poundage” or multiplier (the number of pence payable per £1 of RV), with separate multipliers for smaller and larger properties and, from 2026, for different types of use.
In simple terms, the formula is: business rates bill per year = rateable value × applicable multiplier, before applying any reliefs or supplements such as Small Business Rate Relief (SBRR) or retail, hospitality and leisure reliefs.
VOA policy shift on serviced and coworking offices
Historically, many serviced office and coworking buildings were “split” for rating purposes, with each suite or private office where a customer had exclusive possession treated as a separate hereditament with its own RV and bill.
This approach meant that an empty office generally carried no immediate rates liability, because the unit was not in beneficial occupation by either the operator or a customer, and it also enabled thousands of small businesses to qualify individually for SBRR by occupying suites below the relevant RV thresholds.
From split hereditaments to single assessments
In the last couple of years, driven by an evolving line of case law on rateable occupation, the VOA has begun to reverse this practice for much of the flexspace sector.
Guidance emerging in 2024–2025 indicates a presumption that many serviced and flexible buildings will now be assessed as a single hereditament – with the operator treated as the rateable occupier of the entire building – unless contracts and usage patterns clearly demonstrate multiple truly separate occupations.
The VOA has linked this shift to cases such as Cardtronics v Sykes, Ludgate House v Ricketts and more recent decisions, arguing that the economic reality is often that the operator controls and manages the whole space, providing a bundled service rather than granting conventional exclusive tenancies.
Industry groups, by contrast, point to a 2023 understanding with the government under which splitting remained permissible where there was clear evidence of exclusive occupation, and accuse the VOA of implementing a major policy change via valuation practice rather than explicit legislation.
Consequences for empty space and SBRR
The first direct consequence of whole‑building assessment is that business rates become payable on the entire flexspace center, regardless of how many desks or offices are actually let to end users at any given time.
Operators thus carry full rates liability on void space, turning what used to be a largely variable, pass‑through cost into a much more fixed overhead that must be priced into licence fees even when occupancy dips.
Secondly, whole‑building assessment effectively removes SBRR from many small businesses who occupy space within flex centers. Under the split‑unit model, a micro‑business renting a small office with, say, a £10,000–£15,000 RV could achieve either full or tapered relief, sharply reducing its rates burden; under the single‑hereditament approach, the entire building’s RV – often several hundred thousand pounds or more – sits far above SBRR thresholds, and the operator rather than the individual occupier is the ratepayer.
Industry estimates suggest that thousands of small firms face indirect cost increases as operators seek to recover higher aggregate rates bills through service charges and licence fees, leading some flexspace providers to describe the change as a “stealth tax” on small business growth and on the very flexible working models that government policy elsewhere purports to encourage.
At the same time, the ability to secure VOA approval for new “splits” has reportedly slowed markedly, as cases are pushed towards the tribunal system for clarification, leaving operators with prolonged uncertainty about their ultimate liability.
Rising multipliers and the new tiered structure
Alongside valuation‑practice changes, the Government is also leaning more heavily on the business rates system as a revenue‑raising tool to address persistent fiscal deficits.
General uprating to raise revenue
For 2025–26 in England, the standard national multiplier (applicable to larger properties above the small‑business threshold) has already been uprated in line with consumer‑price inflation, while the small‑business multiplier has been frozen to offer limited protection to the very smallest hereditaments.
However, this is only a staging post to a more significant structural reform scheduled for April 2026, when the current two‑multiplier regime will be replaced with a five‑tier system that both differentiates between Retail, Hospitality and Leisure (RHL) and non‑RHL uses, and introduces a distinct high‑value band.
The five‑tier system and large property multiplier
From April 2026, subject to final confirmation in the 2025 Autumn Budget, the multipliers in England will be reorganized along the following lines.
- Two lower “small business” multipliers for properties under £51,000 RV: one for RHL and one for non‑RHL occupiers.
- Two “standard” multipliers for properties with RV between £51,000 and £499,999: again split between RHL and non‑RHL.
- One “large property” multiplier for all hereditaments with RV of £500,000 and above, which by design will sit at a premium to the standard non‑RHL rate, within statutory safeguards that limit the differential but still allow a materially higher poundage for large assets.
Government documentation describes the reform as a way to support smaller, high‑street‑facing businesses while requiring larger, higher‑value properties to make a “fairer” contribution to local services and deficit reduction.
For large, non‑RHL properties — a category that includes many multi‑let office buildings and flexspace centres — the clear implication is a higher effective tax rate relative to today’s standard multiplier, particularly when combined with the 2026 revaluation that will reset RVs to reflect rental values as at April 2024.
Combined impact on coworking and serviced offices
The interaction of these two developments — VOA consolidation of hereditaments and the introduction of a higher multiplier for large, non‑RHL premises — poses a particular challenge for U.K. coworking and serviced office operators.
- Many sizeable centers in major cities will fall squarely into the new “large property” band once their post‑2026 RVs are established, pushing their poundage above the standard rate and further increasing the operator’s gross rates bill.
- At the same time, the loss of unit‑by‑unit assessments means that this higher bill is payable on the entire building irrespective of voids, and cannot be mitigated by SBRR at occupier level, making the operator’s cost base more fixed and more sensitive to even modest increases in multiplier.
In economic terms, the model begins to look much closer to that of a traditional landlord holding a large single hereditament with significant non‑recoverable costs, but without the same long, upward‑only leases that historically underpinned investment in conventional office assets.
For flex operators who rely on relatively short licences and on maintaining high occupancy levels at competitive all‑inclusive prices, the combination of whole‑building rating and a premium multiplier for large properties threatens margins and may force price rises that erode the cost advantage over conventional space.
Sector bodies have warned that, taken together, the VOA’s reinterpretation of occupation and the Government’s decision to load more of the tax burden onto larger hereditaments could lead to center closures, reduced investment in new flexspace and a contraction of choice for the small businesses and growing firms that have come to depend on flexible offices.
For policymakers, the tension is clear: at the very moment when flexible, short‑commitment workspace is helping to support entrepreneurship, hybrid working and urban regeneration, the structure of the business rates system is moving in a direction that risks undermining its economics.
