Business rate accounting refers to the systematic process of recording, tracking, and managing the tax obligations a business incurs from occupying non-domestic property. It involves ensuring accurate calculation, timely payment, and proper financial reporting of business rates, which are a significant operational cost for many companies.
What Are Business Rates?
Business rates are a tax on the occupation of non-domestic property, encompassing various types of commercial premises such as shops, offices, warehouses, and factories. These rates are charged by local councils and contribute to the funding of local services. Unlike residential council tax, business rates apply directly to commercial properties.
How Business Rates Are Calculated
The calculation of business rates primarily depends on two factors:
- Rateable Value (RV): This is the estimated open market annual rental value of a property, determined by the Valuation Office Agency (VOA) in England and Wales. The VOA regularly revalues all non-domestic properties to reflect changes in the property market.
- Multiplier (or 'Poundage'): This is an amount set by the government each year, expressed in pence per pound of rateable value. There are typically two multipliers:
- Standard Multiplier: Applied to properties with a higher rateable value.
- Small Business Multiplier: Applied to properties eligible for small business rate relief, which is usually lower.
Formula: Business Rates Payable = Rateable Value × Multiplier
The Accounting Process for Business Rates
Business rate accounting is crucial for accurate financial reporting and cash flow management. It follows standard accounting principles, primarily the accruals concept.
Recording Business Rates in Financial Statements
Businesses typically record business rates as an operating expense.
Profit & Loss Account (Income Statement)
- Expense Recognition: Business rates are recognized as an expense in the period to which they relate, regardless of when they are paid. This aligns with the accruals principle.
- Classification: They are usually categorized under "Administrative Expenses," "Occupancy Costs," or "Property Expenses."
Balance Sheet
- Accruals and Prepayments:
- Accrued Expenses: If business rates have been incurred but not yet paid by the end of the accounting period, an accrual (current liability) is recognized.
- Prepaid Expenses: If business rates have been paid in advance for a future period, a prepayment (current asset) is recognized.
- Example: A business pays its annual business rates in April for the year ahead. At the end of its financial year in December, a portion of that payment relates to the next financial year (January-March). This portion would be recorded as a prepaid expense on the balance sheet.
Practical Accounting Entries
Here's a simplified look at the journal entries:
| Date | Account | Debit (£) | Credit (£) | Description |
|---|---|---|---|---|
| Initially | Business Rates Expense | XXX | To record the business rates expense for the period | |
| Business Rates Payable (Liability) | XXX | To recognize the liability for rates incurred | ||
| Upon Payment | Business Rates Payable (Liability) | XXX | To clear the liability when payment is made | |
| Bank | XXX | To record the cash outflow for business rates | ||
| Adjusting Entry | Prepaid Business Rates (Asset) | XXX | To recognize rates paid in advance for the next period | |
| Business Rates Expense | XXX | To reduce expense for the portion that is prepaid |
Key Considerations and Reliefs
Effective business rate accounting also involves understanding and managing potential savings through various relief schemes and the appeals process.
Understanding Business Rates Reliefs
Governments and local councils offer various reliefs to reduce the burden of business rates, particularly for smaller businesses or specific sectors. It's essential for businesses to check their eligibility.
Some common reliefs include:
- Small Business Rate Relief (SBRR): Significant relief, often up to 100%, for properties with a low rateable value, reducing or eliminating rates for small businesses.
- Rural Rate Relief: For businesses in designated rural areas.
- Charitable Rate Relief: Up to 80% mandatory relief for registered charities, with local councils having discretion to top up to 100%.
- Retail, Hospitality, and Leisure Relief: Temporary relief schemes introduced by the government during specific economic challenges (e.g., during the COVID-19 pandemic).
- Empty Property Relief: Granted for a limited period (e.g., three months for most properties, six months for industrial properties) when a property is vacant.
- Transitional Relief: Caps increases in business rates following a revaluation, ensuring changes are introduced gradually.
| Relief Type | Description | Eligibility Example |
|---|---|---|
| Small Business Rate Relief | Reduces or eliminates rates for businesses occupying properties with low rateable values. | RV below a certain threshold (e.g., £15,000 for 100% relief). |
| Charitable Relief | Mandatory relief for charities, plus potential discretionary top-ups. | Registered charities using property for charitable purposes. |
| Empty Property Relief | Relief for a limited period when a property is unoccupied. | Property vacant for up to 3 or 6 months. |
| Retail, Hospitality & Leisure | Specific government-mandated relief for businesses in these sectors, often temporary during economic downturns. | Shops, restaurants, hotels, gyms, etc. |
Appeals and Refunds
Businesses have the right to appeal their rateable value if they believe it is incorrect. A successful appeal can lead to a reduction in future rates and potentially a refund for overpaid rates. Proper accounting for such appeals, including contingent assets for potential refunds, is vital.
Practical Management of Business Rates
Effective business rate accounting involves proactive management:
- Regular Review: Periodically review rateable values and eligibility for reliefs.
- Budgeting: Accurately budget for business rate expenses to avoid cash flow surprises.
- Compliance: Ensure timely payments to avoid penalties and interest.
- Professional Advice: Consider engaging surveyors or tax advisors for complex cases or appeals.
Example: Simplified Business Rate Calculation
Let's assume a business property has:
- Rateable Value (RV): £20,000
- Standard Multiplier: £0.512 (51.2 pence) for the current year
- Small Business Rate Relief Eligibility: The business is not eligible for SBRR.
Calculation:
Business Rates Payable = RV × Multiplier
Business Rates Payable = £20,000 × £0.512 = £10,240
This £10,240 would be the annual expense to be recognized and accounted for by the business.
Conclusion
Business rate accounting is an integral part of financial management for any entity occupying non-domestic property. It extends beyond simply paying a tax; it involves understanding the basis of the charge, accurately recording it in financial statements, and strategically managing potential savings through reliefs and appeals.
