Businesses large and small are the backbone of our economies, and enterprise is the engine of our prosperity. That is why Britain is – and will always be – open for business: open to investment in our companies, infrastructure, universities and entrepreneurs.

–  Theresa May, Davos, January 2017

Entrepreneurs are used to taking risks. And in applying for a Tier 1 (Entrepreneur) visa, they will certainly be taking one.

While in the three years to December 2016 the UK issued entry clearance to 2,821 holders of entrepreneur visas, and granted in-country extensions of leave in 7,283 cases in the same category, the refusal rate for both applications has consistently hovered around the 50% mark.

This makes it the UK visa route with the highest refusal rate outside of the asylum category.

In light of recent political developments, this is important. According to research, there were 35,193 directors of newly-founded UK tech businesses in 2014, with 7,426 of those being foreign nationals. Of the new 2014 directors, 3,188 were EU nationals.

Although it is still very far from clear what rules will govern the rights of European nationals who wish to live and work in the UK after exit, early indications suggest that free movement will almost certainly not exist in its current form. European nationals coming to the UK who wish to set up or run a business will most likely have to negotiate this application process, or something very similar.

This article considers the requirements of the entrepreneur route, its future, and tender some thoughts as to why the refusal rate remains so stubbornly high.

Entrepreneur Route: the Basics

You can apply for a Tier 1 (Entrepreneur) visa if you want to set up or run a business in the UK. Applications can be made from abroad, or from inside the UK if applicants have previously had leave to remain as entrepreneurs, or in certain other limited categories. The eligibility requirements are different in each case. There is a handy overview of the route, as well as detailed guidance on the Home Office website. The relevant Immigration Rules appear at 245D.

The main requirements for the entrepreneur route are access to sufficient funding for investment in a business, a clear plan as to how the business is to be set up or run, and job creation. Applicants are required to supply a business plan which will be scrutinised for viability by civil servants at the Home Office.

The initial visa is valid for 3 years 4 months, and is extendable for a further two years, after which an application for settlement can be made. There is also opportunity for ‘accelerated settlement’ in the event that the business is particularly successful, or creates a certain number of full-time jobs. In these cases, the period after which settlement can be granted is reduced to 3 years.

The amount required to be invested in the business depends on the source of the funds. You can apply if you have access to £50,000 in investment funds from a UK entrepreneurial seed funding competition endorsed by the Department for International Trade (DIT), or a UK government department making funds available for the purpose of setting up or expanding a UK business, or funds from an appropriately regulated venture capital firm.

Applicants without access to this specified funding will need £200,000 to invest in their business. The funding rules are slightly different for applicants switching from another visa route. It is also possible to form an ‘entrepreneurial team’ with one other Tier 1 (Entrepreneur) applicant and share the same investment funds, reducing the burden somewhat.

During the period of leave, the entrepreneur is required to create the equivalent of 2 full-time (30 hours per week) paid jobs for at least 2 people who are settled in the UK. Each job must exist for at least 12 months during the visa period. In the event that the entrepreneur fails on this score, they will be unable to extend their stay in the same category.

Entrepreneur case law

In common with the rest of the Points Based System (PBS), the immigration rules governing the entrepreneur route suffer from the same stifling over-prescription and rebarbative drafting.

Cases where the higher courts have criticised the ‘Byzantine’ complexity of the rules have been well covered in previous Free Movement posts, the latest case of SI (India) v Secretary of State for the Home Department [2016] EWCA Civ 1255 containing a PBS provision that managed to entirely flummox three judges of the Court of Appeal.

The few appeal and judicial review cases concerning the entrepreneur visa route do not stray far from these themes.

In R (Imran Idris) v SSHD IJR [2015] UKUT 95 (IAC) the application was refused because there was omitted a landline telephone number and email address in the letter from a third-party investor. In a different (later) case, the High Court found that the requirement to include a landline telephone number in a letter from a sponsor was, in this day and age, irrational: R (Sabir) v SSHD [2015] EWHC 264 (Admin). The Court of Appeal, unhelpfully, and very shortly afterwards, took the opposite view in Iqbal & Tank v SSHD [2015] EWCA Civ 169.

Other cases explore the meaning of what might otherwise thought to be fairly simple phrases: ‘availability’ in Arshad (Tier 1 applicants—funding—”availability”) [2016] UKUT 334 (IAC), and ‘provided to’ in Fayyaz (Entrepreneurs: paragraph 41-SD(a)(i)—“provided to”  [2014] UKUT 00296 (IAC).

There is no longer a statutory right of appeal against a refusal of an application for leave to remain or enter as a Tier 1 (Entrepreneur), and any challenge to an adverse decision now lies in an application for permission to pursue judicial review via the Upper Tribunal.

The ‘Genuine Entrepreneur’ Test

Since January 2013, caseworkers have had to consider whether each entrepreneur applicant is, in fact, a ‘genuine entrepreneur’. Prior to the introduction of this test (2008-2012) the average refusal rate for entry clearance applications was 28%. Since it has been a requirement, however, the average refusal rate has almost doubled to 50%.

The guidance suggests that the following factors ‘must’ be taken into account by decision-makers:

the evidence submitted

the viability and credibility of the source of the money referred to in table 4 of appendix A available for investment

the viability and credibility of the migrant’s business plan and market research into their chosen business sector

their previous educational and business experience (or lack thereof)

their immigration history and previous activity in the UK

if the nature of the business requires mandatory accreditation, registration and/or insurance, whether that accreditation, registration and/or insurance has been obtained

any other relevant information that can be considered within the context of the genuine entrepreneur test as drafted in the Immigration Rules

The guidance confirms at page 23 that, ‘under the genuineness test, [caseworkers] can refuse an application even if the migrant meets the required points total if [they] are not satisfied the migrant is a genuine entrepreneur.’

Dragon’s Den (Croydon Branch)

Of course, the idea of a ‘genuine’ entrepreneur is slightly odd.

If an individual has a product that they wish to develop and sell, but the venture is assessed as having no prospect of success, is that individual’s claim to be an entrepreneur not ‘genuine’? It would be different if the Home Office were simply guarding against fraudulent use of the route as a means of entering the UK with absolutely no intention of setting up a business upon arrival. But the guidance specifically requires caseworkers to probe the ‘viability and credibility of the business plan’.

Assessing whether or not an idea is going to be successful is notoriously difficult. Air BnB were initially rejected for funding by five of the seven groups of investors that bothered to respond to their request for investment. The maker of Trunki suitcases was told that his invention was worthless by a Dragon’s Den panel member, before investing his own money and building a company with a turnover of £7 million. In the UK, approximately 60% of new businesses will have failed by the time a settlement application can be made (generally, after 5 years).

What Diploma?

The guidance also requires caseworkers to investigate an individual’s level of education and previous business experience if they have doubts about the ‘genuineness’ of the entrepreneur.

This is what happened in the case of R (on the application of Zhang) v Secretary of State for the Home Department (IJR) [2015] UKUT 138, where the applicant was invited to interview and quizzed at length about her proposed business plan. While one of the main reasons the application was rejected was due to her failure to disclose a change in circumstances (as required by her visa during a previous stay), the entry clearance refusal decision stated as follows [see paragraph 5 of the determination]:

You have spent approximately 8 years in the UK as a student and have failed to obtain any noteworthy qualifications and have failed two separate degree courses…taking into consideration your … approximately 8 years of study in the UK without any noteworthy qualifications I am not satisfied that you genuinely intend to establish or take over a business or businesses in the UK and that you genuinely intend to invest your money in the business or businesses

Leaving aside the failure to notify of a change of circumstances which was undoubtedly an important factor in this case, assessing an individual’s ability to set up and run a company on the basis that they failed to complete higher education is perhaps not the greatest indicator of the prospective success of any given venture.

It’s not as if Bill Gates went on to do anything worthwhile. Or that lazy dropout Steve Jobs. Or Mark Zuckerberg. In fact, none of the founders of Dell (Michael Dell), WhatsApp (Jan Koum), Uber (Travis Kalanick), Twitter (Evan Williams), Whole Foods (John Mackey), or Wikileaks (Julian Assange) finished higher education. Our own Richard Branson was told on his last day at school that he would either end up in prison or a millionaire. He didn’t have any O-Levels, but he does now have an island.

Neither did many of the individuals on that list have what might be considered ‘previous business experience’ before starting their enormously successful ventures.

Towards a more genuine assessment?

The Tier 1 (Entrepreneur) framework was criticised in a detailed report by the Migration Advisory Committee, who said that there was a strong argument for reform. The route suffered from an identity crisis, the report claimed, unclear about whether it existed to promote innovation and creativity, or to create jobs.

The report also recommended that the government examined ‘alternative delivery options for the genuine entrepreneur test’, suggesting a panel with experience of start-ups and relevant sector knowledge might be in a better position than caseworkers to assess the viability of a business proposition. However, as set out above, and as the report itself acknowledges, even industry experts are not infallible when it comes to assessing entrepreneurial ability.

A simpler solution might lie in an improved monitoring system, whereby checks are made to ensure that the required sums are invested, so that even if the entrepreneurial spirit does not, in fact, burn bright, the immigration system has still facilitated the investment of either £50,000 or £200,000 in the UK economy. This is even provided for in the guidance (paragraph 46).

In reality, it is very hard to tell whether any given idea (or individual) will succeed. Surely, therefore, where the state will benefit from at least some investment even if a business does fail, it would be prudent to give those applying in this route the benefit of the doubt?

British Future

At the current time, this is clearly not happening, with almost half of all applications being refused.

One of the central planks of the argument made in favour of leaving the European Union was that, after exit, the UK would remain competitive in the world. It would still be able to attract the increasingly mobile, wealth-creating talent that has made London a global hub of investment and innovation. Enterprise is the engine of our prosperity, said the Prime Minister at Davos earlier this year.

This article is not about how or whether Britain will become a more or less attractive place to do business after she leaves the Union. However, even the government acknowledges that our membership of the European trading bloc was a key attraction for many entrepreneurs seeking propitious locations from which to launch their businesses. Among the first reasons given in their document ‘Why overseas companies should set up in the UK’ the government (still) states:

Companies based in the UK can reach more than 500 million consumers across Europe.

You don’t pay any duties when importing or exporting within the European Union (EU). The UK also has free or preferential trade agreements with many non-EU countries.

As these advantages melt away after Brexit, the key question is whether European nationals (and other non-EEA nationals) will be willing to engage in this process.

Would, for example, the European national (Estonian) founders of international payments company TransferWise have established their London-based company (worth over $1 billion) if they had needed to apply for a visa with a 50% refusal rate and an incredibly prescriptive set of rules?

Will other (non-EEA) nationalities still apply, without access to the single market, and knowing that huge discretionary power lies in the hands of individual case workers, who may refuse their applications because (in their view) the business plan lacks the ingredients of a viable enterprise?

Maybe they will. But the risks that they do not, both for the government’s vision of a freewheeling post-Brexit business utopia, and for the economy as a whole, are substantial.