The founder of a coworking space who has warned his business could collapse over an “outrageous” backdated business rates bill, has been granted permission to apply for a Judicial Review of his case, on “all grounds”. Experts suggest the move could unlock a test case for the UK serviced office sector.
When granting permission, the Honourable Mrs Justice Lang DBE said: “The Claimant has raised arguable grounds which merit consideration at a full hearing.”
Hugo Warner, co-founder of the Fisheries London, a workspace in Hackney, East London, believes that his business had been singled out with an “illegal” £500,000 additional tax charge dating back to 2023, a bill the company is unable to pay. This is a 150% increase to the rates already paid.
The case has prompted fears of a stealth tax raid on offices with multiple tenants and has caused uproar in the flex space industry.
The change to how business rates are assessed for serviced offices is set to impose a £600 million annual burden on the UK’s small business infrastructure, according to a report commissioned by the Flexible Space Association. The paper, produced by independent economics consultancy ChamberlainWalker, suggests that the Valuation Office Agency's move to reclassify serviced offices as single hereditaments for business rates purposes would increase liabilities for these spaces by around £5,400 annually.
According to John Webber, head of business bates at Colliers, which is advising the Fisheries, HMRC's Valuation Office, chose to re-rate the Fisheries shared office building as a single establishment, rather than charging it as separate units.
When charged separately the individual tenants are able to claim small business rates relief, and the administration of the tax is handled by the building operator. This has been industry practice for years.
In the last year, though, the Valuation Office, which is now submerged into HMRC, has been moving towards assessing serviced offices as a single property, putting all the rates bill on the operator. In addition, in some cases they are backdating the claims to the beginning of the last rating list in 2023.
In the case of the Fisheries, facing a large historic tax claim threatens the future of the business, its owner says. He argues that if he is forced to pay the backdated bill, the company would become insolvent and go into administration. He claims he has been singled out, as a test case, as his nearby competitors are not facing such bills at the moment, putting him at an unfair disadvantage.
Industry commentators believe the policy has been instigated as a result of pressure from the Treasury to increase income from business rates. In a letter sent by Rachel Reeves to Mr Warner’s MP, the backbencher Dame Meg Hillier, the Chancellor defended the approach of the Valuation Office.
She wrote that the agency had concluded that “most serviced offices will need to be assessed as a single property, unless clear evidence demonstrates a need to split”.
Decisions were being made on a “case by case basis” but the agency was looking to “clarify the application of case law on serviced offices”. The agency would then “consider its approach to the rest of the sector”.
The Chancellor added that applying a single rating to the building that falls on the operator would mean that small and microbusinesses working inside the office “face no business rates at all”.
Experts says that in reality such operators would need to pass any changes to the rates bill on to those small businesses, increasing their costs. “It’s effectively a tax on small and microbusinesses,” says Webber. "And for many it could just be too much.”
He continued: “The VO’s behaviour has been arbitrary, outrageous and often contradictory. It does not follow new case law, despite its claims to the contrary. It is just trying to justify its new policy by picking on one small company which it thinks won’t be able to fight back.”
Webber added: “This is a Treasury bid to raise extra revenue. If it is successful the government could consider rolling this damaging policy out against the serviced office sector more widely, which would be a massive hit to providers of flex space, to small businesses and to the economy as a whole. It would be a mad thing to do, particularly in the current economic climate. We are delighted that the Honourable Mrs Justice Lang DBE has granted our client permission to apply for judicial review on all grounds and we will be fighting this unfair tax all the way.”
Colliers says that The Exchequer Secretary to the Treasury, Daniel Tomlinson MP, is aware of the issue following various meetings with FlexSA, but no resolution has been reached.
A HMRC spokesperson told CoStar News: "Developments in case law have meant we’ve had to review our understanding of the way serviced offices are assessed, and we’re engaging with industry representatives to discuss our approach.
"We will apply the law based on the facts of each individual case."