Are Business Rates Exempt from VAT?

Business rates play a significant role in the financial responsibilities of businesses operating in the United Kingdom. However, questions may arise about the interaction between business rates and Value Added Tax (VAT). 

In this article, we will explore the relationship between business rates and VAT, including whether business rates are exempt from VAT, the applicable VAT rates for business rates in the UK, and the possibility of VAT reclaims. We will also touch upon the responsibilities regarding business rates payments for landlords and tenants.

Business rates are charged on most non-domestic properties like:

• Shops
• Offices
• Pubs
• Warehouses
• Factories
• Holiday rental homes or guest houses

Think of Business Rates as Council Tax but for businesses.

So, if you have been left confused as a business owner about whether ‘business rates are exempt from VAT?’ here’s the simple answer: 

Yes, business rates are exempt from VAT. Certain costs fall outside the scope of the UK VAT system which means VAT is not applicable to them. Costs that fall into this category include business rates, council tax, staff wages to name but a few. 

So, the short answer is yes business rates are exempt from VAT. We have covered various scenarios below to help you understand how to process business rates from a VAT perspective in your accounting software and what reliefs may be available to your business to reduce your business rates.

Are business rates out of scope for VAT?

In general, business rates are considered out of scope for VAT. This means that business rates are not subject to VAT and should not be included in the VAT calculations for businesses. However, there are some exceptions and specific circumstances where VAT may be applicable to certain elements of business rates, such as additional services provided alongside the rates.

What is the VAT on business rates in the UK?

As business rates are typically considered out of scope for VAT, no VAT is levied on the standard business rates charged by local authorities in the UK. However, it is important to note that some additional services provided alongside business rates, such as waste collection or parking facilities, may be subject to VAT.

The rates of VAT in the UK for these types of services will typically be 20%. It is important to check the bill received from your local authority to claim the correct amount of VAT.

Are business rates T0 or T9?

In the UK VAT system, T0 in Sage refers to transactions that are zero rated supplies for VAT. As business rates are generally considered out of scope for VAT, they can be classified as T9. T9, on the other hand, refers to outside of scope supplies. While business rates are not zero rated, they are classified as out of scope. Business Rates would therefore not be seen on a UK VAT Return as with any other supply that is outside the scope for VAT purposes.

For more examples on what might be a T9 transaction in Sage why not check out our guide in what is T9 used for in Sage.

Can you claim VAT back on business rates?

As business rates are generally out of scope for VAT, businesses cannot typically claim VAT back on business rates payments. However, if there are additional services provided alongside business rates that are subject to VAT, the VAT on those services may be reclaimable if the business is VAT registered and meets the necessary conditions for VAT recovery.

Business rates exemption

Business rates are not exempt from payment, but there are certain reliefs and exemptions available based on specific criteria. These reliefs, such as Small Business Rate Relief or Retail Relief, can help eligible businesses reduce their business rates liabilities.

We would recommend exploring the types of business rates relief first to see if there is anything you might be able to receive. There are currently 13 different types of business rates relief.

Following that there are several companies that will complete a review of your rates valuation. These companies will review the valuation provided by the VOA and in some cases are able to get the valuation reduced which could be the difference between a business rate relief being applicable or not. Many companies will work on a percentage of the saving achieved on a no win no fee basis so you have nothing to lose.

FAQs on whether business rates are exempt from VAT

Business rates VAT code Sage?

In accounting software like Sage, the VAT code used for business rates should generally be set as T9 or “Out of Scope” to reflect their VAT treatment. It is advisable to consult the specific guidelines provided by the software provider or seek professional advice to ensure accurate VAT coding.

In QuickBooks this would be the equivalent of No VAT and you can find out more about what does no vat mean in Quickbooks in our article.

Like Quickbooks Xero also uses the reference of No VAT for those transactions outside the scope of VAT. Read our guide for more examples of when to use No VAT in Xero.

Business Rates checker

A business rates checker is a tool or service provided by local authorities or other organisations that allows businesses to verify their business rates obligations. These checkers provide information on the rateable value of the property, applicable reliefs, and other details related to business rates.

Once you have established your rateable value you can then double check the amount you have been charged by your local authority and whether there are any rates reliefs available to your business.

Your business rates could change if:

• You move or make changes to your premises
• The nature of your business changes
• You sublet part of your property
• You merge 2 or more properties into 1

Make sure you report these changes to the Valuation Office Agency (VOA) to make sure you are paying the right amount and do not fall foul of a backdated bill.

Business rate valuation are checked over several years so this could cause a big cashflow problem if incorrect.

On the flip side a change to premises could also mean you are overpaying so its important to make sure you check your business rates. A small change in the rateable value of a property might mean you are now eligible to a business rate relief that could be worth thousands.

Business rates loopholes?

While there may be specific cases where businesses can challenge their business rates assessments or explore potential reductions based on exemptions or reliefs, it is important to note that intentionally exploiting loopholes to avoid or evade business rates obligations is not advisable. It is crucial to comply with applicable regulations and seek professional advice to ensure proper compliance and ethical business practices.

Do I have to pay business rates on a storage unit?

Whether business rates apply to a storage unit depends on various factors, including the specific use and classification of the storage unit and applicable regulations in the local area. In some cases, storage units may be exempt from business rates or eligible for reduced rates based on specific criteria. It is advisable to consult with the local authority or seek professional advice to determine the specific business rates obligations for a storage unit.

Who pays business rates, landlord or tenant?

In most cases, the occupier or tenant of a commercial property is responsible for paying the business rates. However, there may be situations, such as when the property is vacant or sublet, where the responsibility may fall on the landlord. It is essential to refer to the lease agreement and understand the specific arrangements between the landlord and tenant regarding business rates payments.

If you get empty property relief, you do not have to pay business rates on your empty property for 3 months. The relief starts from when the property becomes empty. After this time, most businesses must pay full business rates.

Conclusion

Business rates and VAT have a distinct relationship in the UK. While business rates are generally considered out of scope for VAT, there may be exceptions for additional services provided alongside business rates. It is crucial for businesses to understand the applicable VAT treatment and any potential exemptions or reliefs available for business rates. Seeking professional advice, understanding local regulations, and maintaining compliance with VAT and business rates obligations will ensure proper financial management and adherence to legal requirements.