What does the Tier 2 immigration review mean for startups?

An explainer of the Migration Advisory Committee’s review

The headlines

• Today (19th January 2016) the government’s Migration Advisory Committee published its report on Tier 2 (skilled worker) migration
• There is likely to be an increased minimum salary threshold for Tier 2 migrants, up to £30,000 from the current £20,800.
• There is also likely to be a new ‘immigration skills charge’ of £1,000 per year for each Tier 2 migrant paid by their employer. This will be paid upfront (i.e. a 5 year visa would cost employers £5,000 upfront).
• The MAC suggested that startups may be harmed by an increased salary threshold, noting (at our suggestion) that they often pay below market rates but make up for it with equity. They recommend the government considers whether startups are a ‘special case’.
• Thankfully the MAC rejected some of the government’s more extreme ideas, including limiting Tier 2 to just a list of shortage roles, restricting the rights of dependents to work, and time-limiting how long a role can be considered in shortage.

What happened today?

Today the Migration Advisory Committee (MAC) published their review of the Tier 2 (skilled) immigration. The MAC is an independent group of economists who advise the government on immigration policy — in other words what they say isn’t government policy, although government often does what they suggest.

What is Tier 2 (and the current rules)?

Tier 2 is the immigration route for skilled workers from outside the EU who have an offer of employment in a UK company. Companies need to become a sponsor accredited by the Home Office, the migrant needs to have a degree level qualification (NQF6+) and also meet a minimum salary threshold (25th percentile for the role). There is a cap of 20,700 on Tier 2 (General) certificates of sponsorship, when this is hit, applications are prioritised on the basis of the shortage list, and then by salary.

Why were the MAC reviewing Tier 2?

The Prime Minister gave a speech last May in which he commissioned the review giving the MAC a remit to advise on “significantly reducing the level” of skilled migration to the UK. The MAC’s commission included several ideas on which they were to advise, including:

• Raising the salary threshold. Currently employers need to offer a salary that is both above £20,800, and also higher than the 25th percentile in the income distribution for that role. The government has asked what the implications would be of raising this.
• Restricting what roles are eligible. The MAC have been asked how to restrict Tier 2 to ‘genuine skills shortages’, which could mean scrapping most of Tier 2 altogether and just retaining a version of the Shortage Occupation List.
• Time limits on shortages. Limiting the amount of time a role can be classed as in shortage (to incentivise industry to invest in training to solve that shortage).
• Skills levy. A new skills levy to be imposed on employers who hire from outside the EEA (which could be used to help fund new apprenticeships).
• Restricting rights of dependents. Currently dependents of those on Tier 2 visas have an automatic right to work in the UK; the government wants to look at the impact of removing the right for dependents to work.

How was Coadec involved?

The MAC consulted widely, including with Coadec — here’s the report we sent them on why the UK’s digital economy relies on international talent.We also pulled together an open letter from over 230 startup founders to the Prime Minister urging him not to shut off the supply of talent.

What did the MAC recommend?

The MAC supported two of the government’s ideas, and these are the main changes that are likely to come out of this review:

• Increasing the salary threshold. The MAC’s view is that salary is the best objective measure they can use to determine the value of a migrant, to help select and prioritise who can come into the UK. This is why they have recommended that the minimum salary threshold for Tier 2 (General) migrants should be raised from £20,800 to £30,000.
• Skills levy. The MAC argue that a new Immigration Skills Levy would serve to reduce demand for migrants, and help pay for the UK labour market to be upskilled. They suggest the level should be set at an upfront charge of £1,000 per year (ie that it would add £5,000 to the upfront cost to employers of a 5 year visa).

The MAC rejected three of the government’s ideas, arguing against:

• Restricting what roles are eligible. The MAC argue that restricting Tier 2 to just a list of specific roles in shortage would be impossible, and that it is better to use price (i.e. salary) as a measure of the value of migrants than trying to list which job titles make the cut.
• Time limits on shortages. The MAC argue that that they already have a process for looking at shortages, their regular reviews of the Shortage Occupation List, and that any automatic sunsetting could lead to skills shortages.
• Restricting rights of dependents. The MAC argue that there is no evidence that dependents displace UK residents, and note that restricting their rights to work would harm the public finances and make integration in society more difficult.

The MAC also suggested reform of the Tier 2 Intra-company transfer (ICT) route. This will mainly affect large IT players (think Tata or Infosys) who use the route to bring in contractors (with the MAC noting that “Indian information technology workers comprise over 90 per cent of such migrants”). The MAC recommend that third party contracting should become a separate route within Tier 2, with a new salary threshold of £41,500, essentially limiting this route to senior managers.

What will this mean for startups?

The biggest new element for startups will likely be the Immigration Skills Charge, as this will significantly increase the upfront cost of hiring a worker from outside the EU. As the charge must be paid upfront, this could add up to £5,000 to the cost of hiring a non-EU employee.

On salary thresholds, there is still some hope. The MAC recognised that startups tend to pay below market salary rates, but make up for this by offering employees equity in the business. As a result, they suggest that government may consider them a special case:

It is possible that higher salary thresholds could be damaging to growth in the tech sector, for example, if start-ups are unable to access the talent they need. Partners told us that often highly skilled specialists take jobs at start-ups for lower salaries, in exchange for an equity share in the business. As the business develops, this equity share could become highly valuable, but it is not taken into consideration with respect to meeting the salary thresholds…

The Government may wish to consider the special case for start-ups as they are likely to be disproportionately affected by the higher salary thresholds

We hope the government take note of this!

Overall thoughts?

We knew this wasn’t going to be good. After all the entire remit of the exercise was “significantly reducing the level” of skilled migration to the UK.

The MAC estimate (see 10.64) that higher salary thresholds could result in a drop of around 13% for Tier 2 applications, and a drop of 22% for those switching into Tier 2 when already in country.

Specifically for digital roles, the MAC suggest (see table below) that a £30,000 threshold would affect applications from 48% of web design and development professionals, and applications from 36% of IT and telecommunications professionals.

These are big proportions, and that is why it is good news that the MAC suggested that startups should be considered a special case, and we hope that the government listens.

It is also welcome that the MAC rejected some of the government’s more damaging ideas, including including limiting Tier 2 to just a list of shortage roles, restricting the rights of dependents to work, and time-limiting how long a role can be considered in shortage.

So, while this isn’t a good outcome, it could have been worse.

What next?

It’s important to remember that the MAC does not set government policy. We now need to wait for any announcements from the Home Secretary setting out their response to the MAC’s report. They usually listen to what the MAC say, however, it’s possible that they will consider that it doesn’t go far enough.

For Coadec’s part, we’re going to be keeping up the pressure on our #SaveSkilledMigration campaign, to try to ensure that government recognise that international talent is vital to the success of the UK’s digital economy.