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Analysis by former Treasury economists warns of £593.8m annual hit to the UK’s flexible workspace sector.
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Up to 150,000 workers could be forced to return to working from home as business rates valuation shift threatens to trigger office closures and price hikes for small firms.
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High streets face £260m loss in local spending as rising costs force micro-businesses back to homeworking.
A methodological shift in how business rates are assessed for serviced offices is set to impose a £600 million annual burden on the UK’s small business infrastructure, undermining the Government’s central mission for economic growth, a new report warns today.
The research, conducted by independent economic consultants and former HM Treasury and MHCLG economists, reveals that a change in Valuation Office Agency (VOA) practice, moving away from the “individual assessment” of workspace units, will add an average of £5,400 in annual overheads to every small business operating out of serviced offices, as the impact of this approach deprives those in serviced offices of their Small Business Rates Relief entitlement.
Around 150,000 workers could be forced to work from home as companies would be forced out of their offices with the impact concentrated overwhelmingly on micro-businesses and SMEs in second cities and regional economies.
The knock-on effects will extend beyond individual firms. As higher rents push more workers back into home working, the report estimates that up to £260 million a year could be lost from high street spending, this is on top of the direct hit to jobs and investment for SMEs.
The report’s publication follows warnings raised before Christmas by flexible workspace operators in a letter to the Chancellor, reported by The Times, that the sector would be put “in jeopardy” by the change. The new report is the first national assessment of how big the full impact could be.
Flexible workspaces provide practical, low-risk space for thousands of small businesses that would otherwise struggle to access offices or commercial premises. By offering short, flexible terms and shared facilities, they enable start-ups, freelancers and growing firms to take on staff, collaborate with other businesses and operate from town and city centres rather than from home. Many sites also host training, networking and business support activities, helping firms embed locally and contribute to surrounding high streets. This makes flexible workspace a critical part of the infrastructure that underpins small business growth and local economic activity across the UK. The report estimates that FlexSA members and the businesses operating from their sites support up to 529,000 jobs, while the flexible workspace sector as a whole supports up to 1.75 million jobs across the economy.
The report makes clear that this is not an unavoidable outcome. It says the changes stem from how the rules are being applied, not from a deliberate decision to raise taxes on small firms. Left uncorrected, however, it warns the approach will create “large, concentrated cost increases” that directly undermine the Government’s own growth ambitions and risk hollowing out a sector built to support small businesses.
FlexSA has undertaken crunch talks, with three meetings with the Exchequer Secretary over the last few months, but no solution has been forthcoming.
FlexSA Executive Director, Jane Sartin, said:
“Workspace operators have repeatedly warned the VOA that changes to business rates assessment were already creating serious risks for flexible workspaces and the small businesses that rely on them. The VOA has gone completely rogue. We urgently need the Treasury to intervene against a backwards and harmful tax hike that they never signed on to. This report now shows just how significant the risks are. What looks like a technical change could cause irreparable damage to the sector, with major consequences for jobs, growth and local economies.”
MD of UBC, an operator of 15 centres across the UK, Richard Johnson said:
“I talk to our tenants every day and I know just how hard they’re working to keep their heads above water. These are local entrepreneurs and small teams, not big corporations with deep pockets.
“Expecting a small business to suddenly find an extra £5,400 a year just to keep their office door open is completely unrealistic. If this isn’t fixed, we are just going to see empty desks, we are going to see people forced back to their kitchen tables because they simply can’t afford to be here anymore. The Government has talked a big game about supporting startups, but this is just pulling the rug out from under them.”
Tina McKenzie, Policy Chair at the Federation of Small Businesses (FSB), said:
“These changes will be a major blow for thousands of small businesses and self-employed people based in shared workspaces, effectively stripping away their crucial Small Business Rates Relief just as the cost of doing business is soaring. So many start-ups chose to work in places like this, building their business while avoiding the prohibitive costs of a building of their own.
“It may not stop at office space too, with thousands more businesses based in retail, food halls, workshop and market spaces potentially at threat too.
“Instead of supporting small firms to grow and invest, this move is undermining a crucial lifeline that was designed to support small businesses on our high streets.
“The Government needs to rethink this urgently – only they have the ultimate power to intervene. Previous governments have stepped in before when other similar legal complexities have put businesses at risk, and they should do the same here.”
Chris Walker, founder of ChamberlainWalker, former HMT and MHCLG economist and primary author of the report said:
“The report shows that changing assessments for serviced offices is not a marginal or technical adjustment, but a material cost to a part of the economy that disproportionately supports small high growth firms and local high street ecosystems. This seems entirely at odds with the government’s economic growth objectives. It is just about the most damaging way I can think of for a government to raise what would be a modest amount of revenue.”
