Rates Reforms Choke Off Growth In The Flex Office Renaissance

It has been a tough few years for flexible office operators: The pandemic, changing work patterns and inflation have all taken a bite out of profits for the sector.

And now an esoteric change to business rates rules is giving operators a fresh headache and is threatening to, at best, slow down growth and stymie UK business formation or, at worst, push smaller operators to the wall. 

The industry is fighting the change, which centres around whether flexible spaces are categorised as one office or lots of smaller offices. But time is running out.

“For the smaller operators, this could be catastrophic, and we know that it's already had a significant impact on openings and development of these centres, particularly in the regions,” Knight Frank partner and UK Head of Business Rates Damien Clarke said. 

While flexible workspace has thrived from lean working and fragmenting space, the business rates system has historically struggled to keep pace. However, with the Valuation Office Agency increasingly treating serviced offices as hereditaments — or single, complete entities, in plain English — costs are skyrocketing.

Where operators once benefited from distributing rateable values across multiple occupiers, even down to the level of individual desks — often allowing smaller tenants to qualify for reliefs — they now face assessments at the building level, resulting in a higher overall tax burden that cannot easily be diluted or passed on.

Add to that the 2026 revaluation, which reflects a rebound in office values across many UK markets, and the uplift in rateable values is expected to drive up bills. Layered on top is the introduction of a higher multiplier for larger properties. Buildings with rateable values above £500K will face an additional premium. 

“It's adding costs to the sector. Can the operators pass this on to their customers, the end users? That's a Hobson's choice,” Forsters senior commercial real estate lawyer Owen Spencer said.

The people who use serviced offices are varied, from individuals to enterprise-level businesses. But the lifeblood of the sector is small and medium enterprises and small startups professionalising but not yet at that point where they want to sign a 10-year lease, Spencer said.

“Those businesses often run quite lean, so if the operators put this tax rise directly through to users, they might find they go elsewhere,” he said.

At its most basic, the way business rates are calculated is that a multiplier is set each year, and that is multiplied against the classified value of the building. By grouping the building into one large hereditament, operators are pushed up the value scale.

Not only that, but the multiplier is also going up, from 48p to 50.8p.

“While that sounds like a few pence, if you're multiplying that by an expensive building, those pennies can certainly turn into quite a lot of tax,” Spencer said.

There was also a further increase on that rate of an additional 1p, dubbed a transitional relief supplement, that is meant for one year as a levy to offset those particularly hit by this tax.

The Flexible Space Association has taken up the case, concerned at the impact on the sector, and is lobbying the government to look at the reforms again. Some operators in the sector are also pursuing a potential judicial review of the change.

“The government says case law leaves it no choice but to merge most serviced offices for business rates. We strongly dispute that,” Flexible Space Association Executive Director Jane Sartin said. “No clear legal precedent justifies such a significant and sudden shift. The consequences for workspace operators and the businesses we serve are severe.”

Many face sharp increases in liability and backdated bills, in some cases running into hundreds of thousands of pounds, she added.

“For those that can weather the storm, it will mean passing costs on to their occupiers, including the 150,000 SMEs our members support.”

Office Tier List founder and CEO Zoe Ellis-Moore said the business rates reclassification exposes a fundamental misunderstanding of how flexible workspaces actually work.

“These are not single-occupier office buildings,” she said. “They are local business ecosystems that house a variety of businesses under one roof, each with its own identity, growth trajectory and, until now, its own tax position.

“Business centres are where bedroom businesses take their first steps, where startups scale and businesses collaborate. The FlexSA submission to the Treasury is clear. These spaces operate on low margins. A single assessment does not just hurt operators, it strips small business rates relief from those it was designed to protect.”

Knight Frank's Clarke said he also believes the revisions are causing unnecessary issues for the flex space operators, given that the multiple hereditaments system has been in place for more than 15 years.

He also said that the Valuation Office Agency wants to take a case into tribunal to establish a clear precedent, but he said operators are reluctant to contest the policy through the courts.

“They are saying, ‘Well, I'm not doing that because I don't want to be that person who changes the landscape of how our service flex space is valued,’” he said. “It's all over the place, and it's a bit of a dog’s dinner, to be honest with you.” 

Clarke said he suspects the new ratings will encourage each flex office centre to be set up as its own special purpose vehicle, meaning operators can put single locations into administration if the rating environment becomes too onerous.

For now, there seems little prospect the government will change its mind, given its wider requirement to raise tax revenues for the UK's depleted coffers.

“The government probably sees this as being a loophole that they're closing,” Spencer said. “But it would be counterproductive for the tax authorities if the unintended consequences are to strangle growth by creating a smaller market for the tax to apply to.”