A World of Talent

Foreword

As the UK departs the European Union, small businesses are as important as they have ever been in powering the UK’s economy.

One of the most consistent messages we hear from small businesses is their struggle to recruit, at all skill levels. Consequently, they are afflicted by skills shortages which stunt their productivity, at real cost to both themselves and the whole UK economy. That is why it is so important that while we invest in lifelong learning (something that cannot be achieved overnight), we ensure small businesses can still access talent from across the world.

The vast majority of small businesses have had no experience of using the immigration system. Small businesses will adapt, but they need time and support to adjust to a new way of accessing global talent. We welcome the vision of a single, streamlined points-based immigration system, but this must be accompanied by a significant reduction in the overall costs for small firms; if this doesn’t occur – small businesses will simply be priced out of recruiting talented staff. The Migration Advisory Committee’s salary threshold recommendation of £25,600 is a step in the right direction, but more needs to be done if we are to deliver on the Government’s levelling up ambitions and design a pointsbased system that ensures no sector or region is left behind. Additional points could be awarded for sectors with skills shortages.

Neil Sharpley, Home Office and Ministry of Justice Chair

..small businesses ... struggle to recruit, at all skill levels...at real cost to both themselves and the whole UK economy

Challenges can be overcome and small businesses are willing and ready to play their part, but they need time to adjust. The skills story of the next decade will be one of hard worked for evolution rather than an overnight revolution. Significant Government funding will be needed if the UK’s skill system is to develop sufficiently for the UK to be a global competitive force in the era of the Fourth Industrial Revolution. However, this will take time and small businesses must not face a sharp decline in the availability of international workers at the end of the transition period. This is why in addition to the changes to Tier 2 (General) and the Global Talent visa we must also see the introduction of a temporary unsponsored route that allows workers at all skills levels to come to the UK for a period of two years to work before leaving the UK. The route should also allow for in-country switching.

We must also not forget about the self-employed. The self-employed – now one in seven of the workforce – provide dynamism and flexibility to the UK labour market. The talents and entrepreneurial ability of migrant self-employed contractors and entrepreneurs should not be left out of the conversation on immigration. Applying a points-based system to the Global Talent visa, if designed correctly, could do much to ensure the UK is wide open to talented international freelancers. In addition, a well-designed Innovator visa which includes the right checks and balances will ensure the UK can attract the best entrepreneurs who want to start and grow their businesses in the UK.

This is the dawn of a new era; small businesses are key to the UK’s future economic success and prosperity. To achieve this aim we need sensible, collaborative policy making, realistic time frames, cost reductions, and less bureaucracy, in an immigration system built on a pro-small business approach.

Small businesses faced difficulties recruiting the right staff

26% of small employers have at least one member of staff from the EU (excl. ROI)

Skill levels of EU workers

Engaging with self-employed EU contractors is important

Pay

Visa

Executive summary

Implementing a fair and flexible immigration system is vital for many of the UK’s 5.8 million small businesses. Many small firms rely on talent from outside the UK to plug current skills gaps, grow their businesses and contribute to the wider economy. The challenge now for Government is to build an employer-responsive immigration system before December 2020. The only clear path to achieving this is if the Government chooses to work with the UK business community. In partnership, we can deliver a fair and flexible immigration system that will meet the future needs of all small businesses in the UK.

This report is based on quantitative and qualitative data collated from FSB members. It is structured into eight chapters: small business use of non-UK labour; skills challenges and immigration policy; including skill levels and salary levels; the impact of the Government’s skill and salary level policy on small firms; international comparisons and a new PBS to support small businesses; the temporary route and low-skilled migration; immigration in Wales, Scotland, and Northern Ireland; the sponsorship system and costs; and immigration policies for the self-employed.

Small business use of non UK labour

FSB research found that 26 per cent of small business employers employ European Economic Area (EEA) workers excluding those from the Republic of Ireland (RoI). There are marked regional variations in the employment of EEA workers across the UK, with businesses in London (53%), Scotland (40%) and the South East (31%) employing high numbers of EEA workers.

Medium and high-skilled occupations

FSB’s evidence shows 46 per cent of small businesses employ at least one high-skilled British worker, in contrast to 55 per cent of small businesses with EEA staff that employ at least one high-skilled worker. Small firms want access to the best talent and they also want to invest in their workforce, however, it is clear that there has been a decline in workplace training over the last few decades.

Salary thresholds and a points-based system

FSB has consulted with other small business organisations in Australia, Austria and Canada to understand how PBS systems in these jurisdictions impact small firms. FSB research shows that 58 per cent of small businesses that employ medium-skilled staff would be unable to employ talented workers from overseas based on a minimum salary threshold of £25,600. Despite the MAC’s recommendation of a salary threshold of £25,600, FSB is concerned that such a salary threshold may exclude a significant proportion of small businesses.

While the Government’s commitment to reducing the general salary threshold to £25,600 is a step forward, FSB is concerned that this threshold may still exclude a significant proportion of small businesses. Government should ensure that the minimum salary threshold is set at the right level to enable small businesses to access the talented workers they need whilst ensuring downward pressure is not placed on wages.

Temporary route

FSB’s research shows that half of small businesses that employ low-skilled workers and 57 per cent of small businesses that employ skilled workers (RQF3 and above) would not recruit workers using the temporary route in its current design. Small firms urge Government to introduce a temporary unsponsored route that allows migrants at all skills levels to come to the UK for a period of two years, not one year. This allows small businesses to adjust to changes within the labour market, provides workers with stability, gives employers confidence that staff have sufficient time to make valuable contributions to the business and gives the Home Office sufficient time to build a robust immigration system that will fully support small businesses. In addition, a temporary visa should allow for in-country switching to Tier 2 where an applicant meets the eligibility requirements. Government should also realise the unique nature of the social care sector and create a special visa route for social care workers, ending the categorisation of social care workers as low-skilled and thus valuing their unique role within society.

Immigration in Wales, Scotland and Northern Ireland

The experience of small businesses varies across regions and nations. This section of the report highlights the unique differences in Wales, Scotland and Northern Ireland.

Sponsorship system and costs

Immigration fees are currently very high and thus exclude many small businesses from hiring staff from outside of the EU. FSB evidence shows that nearly half (48%) of small businesses cannot meet the current Tier 2 visa costs for a small business (1-50 employees), which we currently estimate at £3,101. It is essential that these costs are reduced and that carefully regulated umbrella sponsorship bodies are set up, over time, to support small businesses to manage their immigration duties. Change is a common theme within this report and small businesses are ready to embrace it with the support of Government and a newly structured MAC.

Self-employment

The Global Talent Visa route and the temporary route must be designed in such a way that enables small businesses to continue to access self-employed contractors, upon which many of them heavily depend. Our research shows that 30 per cent of small firms in the construction sector believe that engaging with self-employed contractors is important to their business, this rises to 35 per cent for small businesses in the information and communications sector and 41 per cent for those in the professional and scientific sector. An urgent review of the Innovator visa route is also required to ensure the UK is welcoming a breadth of entrepreneurs.

Key findings

Small businesses and non-UK workers

26 per cent of small business employers employ EEA workers (excluding RoI).
11 per cent employ non-EEA migrants.
Of those small businesses that employ EEA workers (excluding RoI):
- 41 per cent mainly employ their EEA workers at a low skill level
- 30 per cent mainly employ their EEA workers at a medium skill level
- 29 per cent mainly employ their EEA workers at a high skill level

Small business employers of skilled staff (RQF3 and above)

59 per cent of small business employers have at least one medium-skilled worker.
65 per cent of small business employers which employ EEA staff (excluding RoI) have at least one medium-skilled worker.
58 per cent of small business employers which employ non-EEA staff have at least one medium-skilled worker.
46 per cent of small business employers have at least one high-skilled w orker.
55 per cent of small business employers which employ EEA (excluding RoI) staff have at least one high-skilled worker.
57 per cent of small business employers which employ non-EEA staff have at least one high-skilled worker.

Tier 2 (General) salary thresholds

80 per cent of small business employers pay their medium-skilled workers below £30,000.
58 per cent of small business employers pay their medium and high-skilled staff below £30,000.
58 per cent of small business employers pay their medium-skilled staff below £25,000.
39 per cent of small business employers pay their medium and high-skilled staff below £25,000.

Impact of a salary threshold and skill threshold (RQF3 and above) on small business employers

17 per cent of small firms that employ skilled staff will replace EEA citizens with UK workers.
19 per cent state that they will continue to employ EEA citizens and thus engage with immigration rules and absorb any additional costs.
6 per cent of small businesses that employ staff that are above RQF3 will invest in machinery and/or information technology and/or automate processes that were previously completed by their workforce, if they struggle to recruit EEA workers post-Brexit.
9 per cent of small firms that employ staff above RQF3 say they will outsource work outside of the UK if they cannot recruit EU workers post-Brexit.

Temporary route and low-skilled migration

57 per cent of small business employers have at least one member of staff that is low-skilled.
Half of small business employers that employ at least one low-skilled worker would not recruit overseas workers using the temporary route.
57 per cent of small business employers that employ at least one skilled worker (RQF3 and above) would not recruit overseas workers using the temporary route.
Of those smaller businesses that believe they could use the temporary route:
- 43 per cent say it would reduce their productivity
- 28 per cent say it would impact on their ability to change/improve job design
- Only 8 per cent say they would increase investment in machinery/information technology/AI to automate processes that were previously completed by their workforce

Sponsorship costs for small businesses

48 per cent of small businesses would not be able to pay the current overall small business sponsorship costs for a Tier 2 visa.
25 per cent of small businesses say they can only afford under £1,000 in sponsorship costs.

Self-employment

30 per cent of smaller businesses in the construction sector state that engaging with EEA self-employed contractors is important to their business.
35 per cent of smaller businesses in the information and communications sector state that engaging with EEA self-employed contractors is important to their business.
41 per cent of smaller businesses in the professional, scientific and technical sectors state that engaging with self-employed contractors is important to their business.

Recommendations

The transition period is due to last until December 2020, while the UK and EU negotiate their future relationship, including in relation to trade and mobility of workers, which is essential for many small businesses. The Government has committed to introducing a new immigration PBS from January 2021. Small businesses are committed to training their staff and making best use of digital technologies to do so. However, they need sufficient time to be able to prepare to manage the additional cost and administrative burdens of a future immigration system. Government also needs time to adjust to dealing with the prospect of millions of small businesses requiring sponsor licences.

That is why FSB is setting out a series of proposals to be phased in over time to enable small businesses to best manage the most significant change in access to labour in decades.

Salary threshold

Consider lowering the proposed minimum general salary threshold of £30,000 for mediumskilled jobs and above. A salary threshold as proposed by the MAC of £25,600 would represent an important step in the right direction. However, a reduction alone will not benefit small firms or the UK labour market. FSB research shows that over half (58%) of small businesses that employ medium-skilled staff (RQF3 and above) do not pay £25,000 or more. Small businesses are concerned that the rigid design of the Tier 2 system, even with a minimum salary threshold of £25,600 may impact the ability of small firms to hire international skilled workers.

Tier 2 (General)

FSB supports the Government’s ambition to implement a points-based system. This would enable businesses to select the best talent and provide the Government with a framework to ensure the most talented are given the opportunity to live and work in the UK. In addition to a job offer, the system should be designed in such a way that even if the minimum salary threshold of £25,600 is not met, points for age, work experience (in country and out of country) and qualifications could sufficiently compensate. Additional points could be awarded for sectors with skills shortages. Whilst FSB is supportive of a PBS, it is imperative that the administrative burden for implementing this system does not fall on the employer.

New entrants

FSB supports the MAC’s recommendation for a general new entrant salary threshold of £17,900 under Tier 2. The definition of a new entrant should be widened to include those who are working towards recognised professional qualifications and those who are moving directly into postdoctoral positions. The new entrant rate should apply for five years, an extension from the current three year entitlement. The age eligibility for the new entrant should also be extended from 26 to 30.

Temporary route

Government should introduce a two year, cross sectoral, temporary route visa that is open to EEA workers, which allows for skilled in-country switching, if an individual meets the eligibility requirements of a Tier 2 or Tier 1 visa. This will ensure the retention of talent and support community integration. The duration of this visa should be two years. Our evidence suggests that a 12 month visa would have a negative impact on productivity and workplace culture. Two years will be a sufficient period of time for small business employers to see the business benefits of employing someone and enable them to invest in on the job training. Making this route available to all sectors, with a cooling-off period of six months, will help small businesses to plug vital skills and labour gaps. In-country switching for skilled migrants to Tier 2, if the eligibility criteria are met, should be allowed to ensure the retention of talent.

Sponsorship and costs

It is essential that Government delivers on its vision of a streamlined sponsorship system with exemptions and mitigations to reduce the costs for small businesses.

Policymakers should be aware that 95 per cent of small firms have not engaged with the current Tier 2 system. Government should complete a full impact assessment of EEA migration under future immigration rules including the effect on small businesses, highlighting the key monetised costs and non-monetised costs.
The next Spending Review should provide the Home Office with sufficient funds to run and effectively manage the UK’s new immigration system. Our research suggests current visa fees price out small firms from employing non-UK skilled staff. The Government should exempt any business that employs fewer than 50 people from having to pay the Immigration Skills Charge.
Small firms should not be denied access to skilled workers because of visa costs. If the Government is committed to ensuring small businesses can employ global talent, visa fees for small firms should not exceed £1,000 for small businesses.
It is essential that a new employer sponsorship system is fully tested and is able to meet the needs of small firms before it goes live. This will enable small businesses to avoid expensive legal advice.
We support the Government’s aim of introducing a light-touch regime. Government should develop and carefully regulate umbrella organisations to act as sponsors for small businesses. An umbrella sponsorship system would support small firms in managing their compliance duties.
Government must ensure effective support, both online and over the phone, is available for small businesses. FSB suggests assigning a specific agent to a file, as soon as an application is submitted. The business owner should be able to communicate directly and get status updates from the agent.
The Government and the Office for National Statistics (ONS) should seek to link datasets across Government to allow a better understanding of the employment outcomes of migrants, for the purposes of research, whilst ensuring confidentiality.

Remote visa

Government should introduce a pilot visa for remote parts of the UK that caters for the specific needs of remote areas, as recommended by the MAC. Remote areas of the UK, such as the Highlands are in urgent need of migrants, as these areas have low and often ageing populations. In addition, remote areas face more complex challenges in recruitment and retention of workers. Government may wish to look at the recent Rural and Northern Immigration Pilot in Canada, which focuses on community groups and employers, with the goal of helping migrants settle and thus increase retention in more rural areas.

Special category for social care workers

The UK is currently facing a social care crisis which cannot be solved by changes in immigration policy; however, the implementation of well-designed immigration policies may alleviate the social care sector from further burdens. It is estimated that it will take 15 years for the UK to generate enough UK nationals to work within the social care industry. With a growing elderly population the UK cannot wait 15 years. FSB recommends the creation of a special category visa for social care workers. Applicants will need to show acceptable English language capabilities and educational qualifications at RQF2. This special category will recognise the unique role that social care workers play in our society. The social care sector should not be deemed as low-skilled; it is unique and the UK’s future immigration system should recognise the vital and human importance of social care in the UK.

Tier 1 Global Talent

This visa route should benefit the self-employed and enable self-employed individuals to support the growth of UK businesses and contribute to innovation in the UK. The MAC’s January 2020 report recommends the Tier 1 Exceptional Talent should also take into account the potential of applicants, not only an applicant’s established exceptional talent. FSB supports this view and we also recommend the Government considers talent beyond the areas of science and technology. FSB seeks to work with Government in expanding the range of areas in which a Tier 1 Global Talent visa may be awarded thus ensuring the UK is open to a range of talented individuals from across the world.

Innovator visa

FSB wants to see this entrepreneurialism continue unabated; the Government should, therefore, commit to reviewing the Innovator visa within 18 months to ensure the eligibility rules are reasonable and protect the UK’s borders.

Future trade agreements and associated agreements in relation to mobility

In addition to the terms of our future FTAs, agreeing youth mobility schemes as part of our future relationship with the EEA and selected other countries will play an important role in the UK’s future immigration system. Supporting these agreements, the Government should consider giving visitors from countries with whom the UK has agreed bilateral agreements the ability to switch from any temporary visa to a skilled visa, as indicated in the 2018 white paper on Immigration, and explore extending the upper age limit for eligibility for the youth mobility scheme from 30 to 35.

Migration Advisory Committee

Government should create an independent Migration Advisory Committee (MAC) which brings together MAC, businesses, trade unions, academics and economists.

A new independent MAC could be modelled on the Low Pay Commission (LPC). This body should advise Government annually on UK migration. The group should also include representatives from Scotland, Wales and Northern Ireland. The criteria for selecting migrants should be adjusted and managed over time to ensure the criteria meets the needs of the UK’s rapidly evolving labour market.

Levelling up for small firms across all regions and nations of the UK

Supporting the development of skills

Small businesses are found in every part of the UK from the most rural and remote areas to the largest cities and urban conurbations. Small firms are an integral part of the Government’s plan to level up the UK. FSB evidence consistently shows that skills shortages are one of the top barriers preventing the growth of small businesses. Our latest Small Business Index (SBI) for Q4 2019 shows that more than a third of small businesses report that finding skilled staff was a barrier to expansion.

The UK’s 5.8 million small businesses are key to the future skills revolution. Small firms should be at the heart of the UK’s future skills policy. To do this Government, both UK and devolved nations needs to ensure the following:

Ring fence a significant proportion of the National Skills Fund to be spent on small businesses. FSB has welcomed the announcement of the National Skills Fund to the value of £3 billion over the course of five years. Investing in on-the-job training and adult education is vital, especially given that an ageing society is one of the grand challenges of our time. The UK should be prioritising lifelong learning, particularly adult education which is dramatically low at the moment.
Top up apprenticeship levy funding, so that smaller businesses can continue to deliver apprenticeships (England only).
Ensure T Levels work for smaller businesses by directly funding employers to meet some of the costs attached to delivering industry placements.

Adoption of digital technologies

Expand the scope of what is covered under the definition of Research and Development (R&D) to allow more small businesses to benefit. More generally, whether through direct or indirect funding, achieve parity of esteem between new to market and new to firm innovation. FSB research shows that less than half of small businesses have adopted relatively basic digital technologies such as file transfer technology or cloud services over the last three years. Therefore, we need to see Government support new to firm innovation through widening the scope of existing interventions such as the R&D tax claims and boosting direct funding through grants schemes such as the Business Basics Fund.

Ensure that by the end of 2021, no premise is experiencing download speeds below 10Mbps irrespective of whether they have engaged their rights under the Universal Service Obligation or not. Our recent research has uncovered that 30 per cent of smaller businesses across the UK are in receipt of download speeds of under 10 Mbps. This must change, quickly, if smaller businesses are to increase their digitisation in the near term. This is as important as the commitment for all premises to have access to full fibre, or failing that Gigabit capable technology by 2025.

Labour market

Extend the one-year Employer National Insurance Contributions holiday for smaller businesses employing service leavers to other labour market disadvantaged groups, such as former care leavers, someone with a disability, a mental health condition, ex-offenders, and the long term unemployed.

Scotland Analysis

FSB Scotland believes that a future immigration system can be designed to respond to the migration and skills needs of smaller businesses in Scotland without creating additional complications or barriers for employers.

Echoing the key messages in our UK report about delivering a system that works for smaller businesses, we propose a number of additional recommendations to address Scotland’s unique challenges.

These proposals focus on how the UK and Scottish Governments could work together to develop a tailored approach to migration in Scotland, including: