With government bonds no longer an investment option for UK Investor visa holders, the attention of many Tier 1 Investors has naturally turned to UK companies, with some savvy investors looking to invest in the UK’s start-up scene. But can Tier 1 Investors invest in UK start-ups?
The policy argument for encouraging investment in UK start-ups
There is a strong policy argument in favour of facilitating foreign investment into UK start-up businesses. Start-ups are the job creators and innovators of the future and transform the way we do business. Richard Branson, who built the Virgin brand and has been a long standing supporter of start-ups, puts it aptly:
“These businesses not only have the potential to become a vital source of employment, innovation and productivity to economies, they are a shining example to younger generations that creativity, passion and hard work can change the world for the better.”
But, as is well known, Tier 1 Investor visa holders must comply with the requirements of the Immigration Rules, including the requirements in terms of permitted investments.
The requirements of the Immigration Rules
Table 8A of Appendix A to the Immigration Rules stipulates that Tier 1 Investor visa holders must now invest not less than £2 million by way of share capital or loan capital in ‘active and trading UK registered companies’.
The term ‘active and trading UK registered companies’ is defined at paragraph 65A of Appendix A to the Immigration Rules.
Where the applicant’s initial grant of leave as a Tier 1 Investor was granted under the rules in place from 29 March 2019 (or the date of application is on or after 6 April 2023, if the application is for entry clearance or leave to remain, or 6 April 2025, if the application is for indefinite leave to remain), paragraph 65A(b) of Appendix A provides that an ‘active and trading UK registered company’ means a company which:
(i) is registered with Companies House in the UK;
(ii) is registered with HM Revenue and Customs for corporation tax and PAYE;
(iii) has accounts and a UK business bank account, both showing regular trading of its own goods or services; and
(iv) has at least two UK-based employees who are not its directors.
An obstacle to Tier 1 Investors investing into UK start-ups?
This definition presents an immediate obstacle for Tier 1 Investors seeking to invest in a business that is in the first stage of its operations. Whilst most start-up businesses will probably be registered with Companies House and HMRC, and many may have at least two UK-based employees, relatively few genuine start-ups (as opposed to early stage ventures) will be able to produce financial accounts and business bank statements showing regular trading of their goods or services.
Interestingly, the requirement to invest in an ‘active and trading UK company’ in Table 8A is only assessed when the Investor applies for an extension of stay at the end of year 3 (assuming they are on the £2 million route). An argument could therefore be made that the rules should permit a qualifying investment in a UK start-up business in circumstances where the business cannot demonstrate regular trading of its own goods or services at the date of investment, but is able to do so at the date of the extension application.
Some support for this approach might be found in the fact that the Immigration Rules do not require the business accounts or bank statements referred to in paragraph 65A(b)(iii) of Appendix A to relate to any particular date or period. Arguably therefore, the absence of business accounts and bank statements showing trading at the date of investment should not be a bar to a successful application for further leave to remain, provided a Tier 1 Investor can provide business accounts and bank statements showing post-investment trading as part of their application for an extension of stay.
However, set against this, it is notable that Table 8A of Appendix A also includes a requirement to invest within 3 months of entering the Tier 1 Investor category. This requirement in fact sits below the requirement to have invested in an active and trading UK company and states:
‘The investment referred to above was made [within 3 months]’ (emphasis added)
The inclusion of the words ‘referred to above’ could be read as meaning that the company must be an active and trading company (and therefore have in place business accounts and business bank statements showing trading of its own goods or services) at the date of investment.
What does the Home Office say about Tier 1 Investors investing in UK start-up businesses?
It is the latter interpretation which, for the time being at least, finds favour with the Home Office. A request to the Home Office’s Tier 1 Investor policy team for guidance on the issue was recently met with the following response:
“the applicant must maintain qualifying investments from 3 months after their date of entry, so the company must satisfy the criteria for being “active and trading” from this time.”
So, there it is. According to the Home Office, an investment in a UK business will not be treated as a ‘qualifying investment’ for the purpose of the Investor immigration rules if the business is not able to produce both financial accounts and a business bank statement showing regular trading of its own goods or services at the date of investment.
One consequence of the Home Office’s interpretation of the rules is that Tier 1 Investor visa holders are effectively prevented from investing in many high growth potential UK start-up businesses.
This is perhaps surprising given not only the policy considerations mentioned above, but also the recent introduction of an immigration route designed specifically to encourage innovative, viable and scalable start-up businesses to set up in the UK.
But, the requirements of the Immigration Rules should not be overstated. The rules do not stipulate that the ‘accounts’ mentioned in paragraph 65A(b) of Appendix A must be final year end accounts. Interim accounts should therefore suffice. Equally, as mentioned above, the business does not have to produce business bank statements covering any particular period. Moreover, ‘regular trading’ is not defined in the rules, leaving scope for the trading to have occurred over a relatively short period of time.
Whilst a start-up company set up for the sole purpose of raising funds will therefore not be a suitable investment opportunity for a Tier 1 Investor, a business with only minimal early stage business activity should still be capable of falling within the definition of a qualifying investment.