WeWork gets tax rebate meant for its small-business tenants

WeWork, which has grown into a global giant in just nine years, is claiming tax breaks in Britain intended for small business.

The New York-based company that revolutionized the commercial property business estimates it has received about 2 million pounds ($2.4 million) in such refunds on 100 million pounds of property taxes since setting up in the U.K. The rebate is likely to rise in coming years due to changes in the British tax system.

The bonus from the taxman stems from how WeWork charges its tenants: They pay a flat rate that includes upfront property-tax payments. That means WeWork gets the tax relief.

Luke MacGregor/Bloomberg

“WeWork's offering provides a holistic solution for businesses that includes paying business rates on behalf of members in the U.K.,” a company spokeswoman said in an emailed statement. “Much in the same way that a WeWork membership includes access to work and meeting spaces, wireless internet, events, and other amenities, the payment of business rates and any associated relief we may receive is built into our model.”

While the sum is a pittance compared to the $3 billion-plus of losses WeWork has posted since 2015, the rebate highlights how new-economy companies are confounding governments at all levels. In the U.K., Amazon.com Inc.’s dominance has prompted lawmakers’ calls for an overhaul of the property-tax system. Taxing American social-media giants has been a source of friction between the U.S. and Europe.

WeWork, whose parent We Co. aims to raise more than $3 billion in an initial public offering, represents the most extreme example of how flexible-office operators have frustrated the intent of small-business commercial property tax breaks in Britain. The company has become the largest private-sector occupier of office space in London less than six years after arriving. Its U.K. business had revenue of 118.3 million pounds in 2017 out of a worldwide total of $886 million, the unit’s most recent accounts show.

“I can’t believe that whoever dreamed up the small-business rates relief was remotely thinking about the serviced office sector,” says Steve Hile, a partner at property consultant Gerald Eve. “There is a huge amount being paid out that really should not be paid out because it is not going where it should have gone.”

Here’s how the tax arrangements work: WeWork divides each of its properties into dozens or even hundreds of individual areas. Each of those spaces, known as hereditaments, is then separately assessed for tax purposes.

That allows the company to claim back the taxes on any area that is empty or small enough to be eligible for relief if they are occupied by a small company with no other offices.

While the practice is commonplace among flexible office operators, WeWork carves its space into much smaller parcels than its biggest competitors, according to a database compiled by open-data consultancy Whythawk. A single WeWork site at 1 Fore Street in the City of London, spread over eight floors, contains about 800 separate hereditaments.

The company’s recently opened space in London’s Waterloo district, the largest co-working space in the world, has the capacity for about 6,414 individuals, according to a document WeWork emailed to brokers earlier this year obtained by Bloomberg News. That would equate to less than 4.1 square meters a person, about half the level recommended by the British Council for Offices trade association.

In the City of London district, which is home to one of the highest concentrations of WeWork properties in the world, officials have resisted WeWork’s attempts to claim the tax break, according to people with knowledge of the matter who asked not to be identified discussing confidential conversations.

“Any application for small-business rates relief must be made by the company or individuals who are in occupation of the office space,” a spokesman for the City of London Corporation said in an emailed statement.

There’s no evidence that WeWork channels the rebate into lower membership fees for qualifying members. The company charges a flat rate for small office spaces — and 450 pounds a month for a hot desk — according to its website. Companies taking numerous desks typically negotiate a bespoke deal.

WeWork’s typical contract doesn’t explain that some customers will be eligible for tax relief and that the company will seek to claim it on their behalf, say half a dozen tenants interviewed by Bloomberg News, some of whom shared copies of their paperwork. Instead, they were asked to sign forms authorizing WeWork to claim back the relief after their membership fee had already been set, they said, asking not to be identified discussing the commercial arrangements with their landlord.

“If WeWork is distributing these reliefs, derived from small-business tenants, across all their clients through lower rents, then effectively WeWork’s small-business clients are subsidizing the rents of big businesses,” says Gavin Chait, a data scientist and founder of consultant Whythawk. “Their small-business tenants qualifying for relief should immediately seek answers from WeWork and ask, where’s my money?”

WeWork updated its membership forms in 2017 to explicitly ask members to “enter into any relevant authorization or additional documents as may be required” for WeWork to manage the payment of their business rates. That includes signing “a separate letter of authority to confirm this.”

— With assistance from Giles Turner and Lucca De Paoli