The UK’s immigration system allows for a category of “entrepreneur” visa applicants, which is designed to encourage UK business activity and create employment. In general, each applicant needs to invest £200,000 in a UK business, and the investment needs to create two new job positions for people who are already settled in the UK (such as UK nationals). You can find more information on the UK entrepreneur visa programme here.
One of the challenges for applicants is that the costs of setting up and administering the actual investments can be high, when compared to the amount invested. So either the value of the investment is diluted, or shortcuts are made – meaning that the investors don’t get the support and protection they really need.
In addition to the costs of immigration advice and application fees payable to the UK Visas and Immigration department of the Home Office, the set up costs for investments may include:
- Finders’ fees (if agents are used to identify suitable investee companies)
- Due diligence investigations and background checks on the UK business, to enable the investor to understand and manage the risks involved
- Legal, tax and accounting advice on the investment.
The ongoing costs of the investment may include:
- Tax and accounting compliance
- Assistance in monitoring the arrangements
- Translation or interpreting services, if required to facilitate board meetings and other communications between the investors and the existing management of the business.
One way to address this is to group a number of investors into a “syndicate”, so as to spread the costs, reduce the risks and maximise the benefits for all concerned.
This article sets out one possible approach to structuring a syndicate to allow up to 5 applicants for UK entrepreneur visas, to invest in the same existing UK business. (In theory, a syndicate could comprise more than applicants, but 5 would seem to be a sensible limit, given that they would all need to become directors of the relevant UK company.)
For the purposes of this article, it is assumed that:
- 5 entrepreneur visa applicants (the “investors”) will jointly invest a total of £1,000,000 in an existing UK business
- the existing UK business is structured as a private limited company (or a group of private companies)
- all the investors satisfy the eligibility requirements for Tier 1 entrepreneur visas
- the UK business has a genuine commercial need for investment in order to grow and create 10 new full-time positions.
The direct investment approach
This route may be suitable if the existing UK company, or a relevant subsidiary of the UK group, is carrying on a business which is permitted for the purposes of the UK entrepreneur visa regime. In particular, that business must not involve property investment or property development.
1. Each of the 5 investors makes a direct loan of £200,000 to the company, on the same terms as each other. The loans cannot be secured on property or assets (but they may be secured by personal or corporate guarantees). The loans must be subordinated to the company’s other creditors. This means that if the company became insolvent, the company could repay the investors only out of the balance available after all other creditors have been paid. (Note that the investment may also be structured as a subscription for shares, but this is usually more complicated and costly to implement.)
2. In accordance with the terms of the loans:
- Each investor is appointed as a director of the company
- The investee company creates a total of 10 new full-time positions, in accordance with an agreed business plan
- The company pays interest at the agreed rate
- If appropriate, the company appoints a service provider chosen by the investors, to ensure that the investors receive regular management information, so that they can participate in board meetings and monitor their investment.
3. The loan is repaid at the end of the agreed term.
The main advantage of this approach is that it is simple to implement. By pooling their investments, the investors can reduce their individual costs and gain more protection. However, the investment remains unsecured, and therefore the investors are exposed to the risks of business failure.
Other alternative approaches
It is possible to put in place other arrangements, which give the investors more control and more security. For example, the investors and the existing UK business could set up a joint venture company. The investors would provide the new company with loan or share capital, and would become directors (together with representatives of the UK business). The new company would hire staff and provide services (or possibly goods or materials) to the existing UK business. The UK business would pay a fee to the joint venture company which would guarantee an agreed level of return to the investors.
One advantage of this type of arrangement is that the joint venture company can take security over property or assets held by the existing UK business – and therefore reduce the investors’ risk.
The downside is that the arrangements are more costly to set up, because they generally need to be adapted more to the particular circumstances of the existing business concerned. In addition, this kind of structure will involve greater operating costs, because the joint venture company will need to comply with ongoing legal, tax, accounting and regulatory requirements.