The Valuation Office Agency values every non-domestic property in England and Wales using one of three VOA business rates valuation methods: rental comparison, receipts and expenditure, or the contractor’s basis. Which method applies to your property depends on the type of premises and the evidence available to the valuer. In every case, the goal is the same: to estimate the annual rent your property would achieve on the open market at a fixed date, assuming it is in reasonable repair and available to let.1GOV.UK. Local Government Finance Act 1988 Schedule 6 Paragraph 2 That estimated rent is your rateable value, and it drives the whole business rates bill.
Two legal fictions sit behind all three methods. The hypothetical tenant is a notional person willing to rent the property year to year with a reasonable expectation of continuing in occupation. The reasonably competent occupier is a standard preventing a particular business’s brilliance or incompetence from distorting the figure. If a struggling café sits in a prime unit, the rateable value still reflects what a competent operator would pay for that location. Property characteristics drive the value; the current occupier’s performance does not.
Rental Comparison: The Default Method
Rental comparison is the approach used for the great majority of commercial properties, including retail shops, standard offices, and industrial warehouses. If similar properties nearby rent for a known amount, those rents show what the market considers your property to be worth. The VOA collects that data from lease agreements and from Rent and Lease Details (RALD) returns submitted by occupiers and landlords.2GOV.UK. Rating Manual Section 5: Valuation Practice – Part 2: Forms of Return and Rent and Lease Details (RALD) The older VO 6003 form served the same purpose but was phased out from 2017.
Raw rents rarely transfer straight onto the rating list. The VOA filters out transactions between connected parties or deals struck at below-market rates. Factors such as poor natural light, lack of heating, or proximity to a transport hub lead to percentage adjustments in the final figure. If a neighbouring warehouse has a £50,000 annual rent but benefits from superior loading-dock access, the VOA adjusts that evidence downward before using it to value a less functional property nearby. Every adjustment must be documented, so a ratepayer challenging the figure can see how it was derived.
How Shops Are Zoned
Shops receive a more granular treatment. The VOA divides retail floor space into 6.1-metre (20-foot) zones running back from the shop window. Zone A, at the front where foot traffic draws customers in, carries the highest value. Zone B, in the middle, is treated as half as valuable as Zone A. Zone C is half again, and anything deeper than 18.3 metres is “the remainder” at half the value of Zone C.3Valuation Office Agency. How We Value: Small Shops The entire shop is then expressed as an equivalent Zone A area, and dividing the adjusted rent by that area produces a price per square metre in terms of Zone A (ITZA). This lets the VOA compare a deep, narrow shop directly against a shallow, wide one on the same high street.
Lease Incentives and Virtual Rent
Lease incentives need particular attention. A rent-free period, a stepped rent, or a landlord’s cash contribution toward fitting-out costs all make the headline rent misleading. The VOA converts the actual terms of the lease into a “virtual rent” representing the true annual cost to the tenant, stripping away the effect of any inducements.4GOV.UK. Rating Manual Section 4: Valuation Methods – Part 1: Practice Note – 2023 Rental Adjustment A rent-free period granted solely for fit-out is excluded from this adjustment, since that time reflects a practical necessity rather than a market incentive. Only the portion of any rent-free period beyond the normal fit-out window is treated as a genuine inducement and rolled back into the annual rental figure.
Receipts and Expenditure: For Trade-Dependent Properties
Some properties almost never change hands on the open market, so comparable rent data does not exist. Pubs, hotels, cinemas, and petrol stations fall into this category because their value is inseparable from the trade the location can sustain. For these, the VOA works backward from the property’s earning potential to arrive at a rent a hypothetical tenant could reasonably afford.
The calculation starts with the gross receipts the business generates annually. The VOA then subtracts the working expenses needed to run the operation, covering labour, supplies, utilities, and similar costs, but deliberately leaving out the rent itself. What remains is the divisible balance: the profit available to be split between the tenant and the landlord. The tenant’s share covers their risk and the return they need on their investment. The residual amount is treated as the rent the tenant could afford to pay, forming the basis of the rateable value.5GOV.UK. Rating Manual Section 4: Valuation Methods – Part 2
A default 50-50 split of the divisible balance was once common, but the VOA’s own guidance notes that a straight 50% is unlikely to be correct for most properties.5GOV.UK. Rating Manual Section 4: Valuation Methods – Part 2 The actual split depends on the property type, the capital a tenant needs to commit, and the risk profile of the trade. A hotel requiring heavy upfront investment will typically see a larger tenant’s share than a simple lock-up kiosk.
Fair Maintainable Trade
The revenue figure fed into the calculation is not whatever the current owner happens to earn. It is the fair maintainable trade (FMT): the turnover a reasonably efficient operator could be expected to generate at that location. For a pub, the VOA assesses FMT by looking at potential income from drinks, food, and any accommodation.6Valuation Office Agency. How We Value: Pubs If actual trade matches what a competent operator would achieve, the VOA uses it directly. But if the premises are over-trading because of a celebrity owner, or under-trading because the operator chooses to open only three days a week, the figures are adjusted to reflect the property’s potential rather than the owner’s personal choices.
The physical characteristics of the property still matter. A modern pub with good facilities on a busy high street is expected to achieve better trade than a dated premises tucked down a side road, even if both serve the same market. The method captures location value through the revenue the location enables, rather than through comparable rents that do not exist.
The Contractor’s Basis: For Specialised Properties
Properties that generate no rental evidence and no meaningful profit data get valued on the contractor’s basis. Large chemical plants, public schools, hospitals, and sewage treatment works fall here. Nobody rents these on the open market, and many produce no commercial revenue. The core idea is that a tenant would never pay more in annual rent than it would cost them to build and own a replacement outright, so the VOA works backward from construction cost to reach an annual rental equivalent.
The Rating Manual sets out a five-stage process.7GOV.UK. Rating Manual Section 4: Valuation Methods – Part 3 Stage 1 estimates what it would cost to build a modern equivalent asset delivering the same functional capacity, ignoring decorative features and redundant elements of the original. Only the utility the property provides matters. Stage 2 applies deductions for age, physical deterioration, and any obsolescence; a 30-year-old school building with outdated heating receives a heavier deduction than one built five years ago. Stage 3 values the land underneath and adds it to the adjusted replacement cost. Stage 4 applies a statutory percentage to convert the combined capital value into an annual rental equivalent. Stage 5, called “stand back and look,” asks the valuer to check whether the result represents a figure a hypothetical tenant would actually pay, adjusting further if the number feels out of step with reality.
Decapitalization Rates
The decapitalization rate is the percentage used at Stage 4 to convert a capital sum into an annual figure. These rates were fixed by regulation in 2016 and remain unchanged for the 2026 rating list. The rate is 2.6% for educational, healthcare, and defence properties, and 4.4% for all other properties valued on the contractor’s basis.8GOV.UK. Business Rates Information Letter 4/2022 – Business Rates Revaluation 20239UK Parliament. Business Rates: The 2026 Revaluation A hospital with a combined capital value of £10 million would receive a rateable value of £260,000. A chemical plant worth the same amount would be assigned £440,000. The lower rate for public-sector properties reflects the view that a tenant’s willingness to pay for essential facilities differs from commercial appetite.
How the VOA Chooses Between the Three Methods
There is no rigid legal hierarchy dictating which method the VOA must use. The Upper Tribunal has stated explicitly that there is no rule of law determining the valuation method; the choice is a matter of professional judgment based on the evidence available. Valuation methods are tools for arriving at a figure that satisfies the statutory test of open-market rental value, not a substitute for that test.
Strong professional conventions still guide the decision. Rental comparison is preferred whenever credible rent data exists, because actual market transactions are the most direct evidence of what tenants will pay. When a property is so specialised that comparable rents are unavailable, the receipts and expenditure method captures value through trading potential instead. The contractor’s basis is reserved for properties where neither rental nor revenue data provides a reliable answer. Valuers may blend methods or weight the results of more than one approach where the evidence warrants it. Whatever method is chosen, the figure it produces must still represent the annual rent a willing tenant would pay on the statutory assumptions.
The Valuation Date Behind Every Figure
Every rateable value on a rating list is anchored to a single date: the antecedent valuation date (AVD). All market evidence, whether rents, trading receipts, or construction costs, must reflect conditions as they stood on that day. For the 2026 rating list, the AVD is 1 April 2024.10GOV.UK. Non-Domestic Rating: 2026 Revaluation Compiled List – Background Information The previous list, which took effect in April 2023, used an AVD of 1 April 2021.11GOV.UK. Non-Domestic Rating: Reval 2023 Compiled List Statistical Commentary and Background Information
Setting the AVD roughly two years before the list takes effect gives the VOA time to collect and process rental data from millions of properties. The trade-off is that by the time your bill arrives, the underlying market snapshot is already two years old. A property whose neighbourhood has changed since the AVD will not see that reflected until the next revaluation. Revaluations in England now occur every three years, following changes introduced by the Non-Domestic Rating Act 2023. The previous cycle was five years.12UK Parliament. Non-Domestic Rating Act 2023
If You Think the Method or the Figure Is Wrong
Challenges to a rateable value in England go through a three-stage system called Check, Challenge, Appeal (CCA). Each stage must be completed before you can move to the next.13GOV.UK. Rating Manual Section 6: Check, Challenge, Appeal and Proposals – Part 1 – CCA England At Check, you confirm or correct the factual details the VOA holds about your property, such as floor area, number of floors, or facilities. If the VOA has not completed the Check within 12 months of your submission, it is automatically deemed complete. At Challenge, you file a formal proposal explaining why the rateable value is wrong; this must be submitted within four months of the Check being completed, and the VOA then has 18 months to issue a Decision Notice. At Appeal, if you disagree with the Decision Notice or the VOA misses the 18-month deadline, you can take the matter to the Valuation Tribunal for England within four months.
Gathering evidence early makes the process faster. Your own rent, any comparable rents you know of, and accurate floor measurements are the material the VOA and the tribunal will weigh. For trade-based properties, your trading accounts and any explanation of unusual performance matter, because they feed directly into an FMT assessment. For contractor’s-basis properties, expect any challenge to focus on the reasonableness of the replacement cost, the age-and-obsolescence deductions, and the final stand-back-and-look sense check.
Material Change of Circumstances
Outside a full revaluation, you can seek a mid-list adjustment if a material change of circumstances (MCC) has made your rateable value inaccurate. Road works blocking access to your premises, the demolition of part of your building, or significant changes in the physical locality can all qualify.14GOV.UK. Rating Manual Section 2: Valuation Principles – Part 7: Material Change of Circumstances The change does not need to be large, but you must demonstrate that it has actually made the listed rateable value inaccurate. Proving the event happened is not enough on its own. Changes attributable to legislation or government guidance, such as lockdown orders or regulatory restrictions, must be disregarded under the Non-Domestic Rating Act 2023. If the MCC is temporary, such as roadworks, your proposal must be filed while the disruption is still ongoing; once it ends, the grounds for a reduction end with it.