Caroline Sherrington from Ignition Law answers reader questions on shares, company records, employment issues and more.
Q: My friend was telling me that Annual Returns no longer exist, is that true and, if so, have they been replaced by something else?
A: Your friend is correct. From 30th June 2017, the requirement to file an “Annual Return” at Companies House (also known as the Form AR01) was scrapped and has now been replaced by what we call a “Confirmation Statement” (or Form CS01). The two forms serve roughly the same purpose: they provide Companies House with up-to-date information on your company for inclusion on the public register with the main differences being: (i) you now need to include information from your “person with significant control” (PSC) register (another new requirement!), and (ii) rather than providing a snapshot of your company data at a specific point in time, you can now just review and “check and confirm” the info Companies House holds is correct.
Q: What does “nominal value” mean when talking about shares?
A: As a starting point, all shares must have some base value assigned to them in order for them to exist – this is called a share’s “nominal value”, eg ordinary shares of £1 each (also known as the “denomination” of the share). It is basically just the par value for those shares and, in reality, doesn’t have a huge amount of relevance for a company. The key thing to remember is that it is not necessarily the same as the “market value” of the shares. Let’s look at an example: a company may have 10 ordinary shares of £1 each in issue. The company may, however, be worth £1,000 in total in the market (ie should a buyer want to come and purchase the company). Each ordinary share, therefore, has a “market value” of £100 per share whilst still maintaining a “nominal value” of £1 each. The £99 difference between the market value and the nominal value is known as the “share premium”.
So, why do some companies have shares with ridiculous-looking nominal values of e.g. £0.00001? A large amount of the time, these companies will have started out with shares of, say, £1 or £0.01 but will have gone through a “subdivision of share capital” to redenominate their shares as shares of, for example, £0.00001. Why do this? Well, let’s take the same example as above – remember, our company has 10 ordinary shares of £1. An investor comes along who wants to invest a certain amount of money in exchange for 20% of the business. To end up with 20% of the share capital, our investor would somehow need to be issued with 2.5 shares in order for it to own 20% of a total 12.5 shares. BUT, you can’t issue half shares so it would be possible to give him the 20% he wanted.
So, what about if you actually had 100 shares in issue at the start instead of 10? Then, if they wanted to invest funds in exchange for 20% of the business, you could grant your investor 25 new shares (nice whole number) out of a new total of 125 shares (another nice whole number). To get from an initial 10 shares to 100 shares, you just need to subdivide your share capital (by a simple board resolution and ordinary shareholder resolution) turning the initial 10 ordinary shares of £1 into 100 ordinary shares of £0.10 (10 x £1 = 10, 100 x £0.10 = 10). Hopefully, from that you can see why companies might need to subdivide their share capital into even smaller denominations: it creates greater liquidity in your share capital and allows you to issue more accurate percentages of shares to investors/employees etc.
Q: What is Gender Pay Gap Reporting? Does it affect my business?
A: Gender pay reporting legislation sets out a requirement for certain employers to publish statutory calculations each year showing how large the pay gap is between their male and female employees.
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For most of you, I would imagine that this won’t be something that you need to worry about for a while as the requirement only kicks in when you have 250 or more employees. It’s certainly worth being aware of it for the future though!
Q: What is the difference between the National Living Wage (NLW) and the National Minimum Wage (NMW)?
Ok, so this does get a bit confusing…
National Minimum Wage – The NMW pretty much is exactly as it sounds, ie it is the minimum pay per hour that workers are entitled to by law and gets reviewed yearly by the government. The rate for each age group in the UK is different and the rate now changes every April (it used to be October).
In April 2017, those aged 18 and under were entitled to £4.05 per hour (NB Workers do need to be of school leaving age (16) in order to receive the benefits of the NMW), 18 to 20-year-olds were allowed £5.60, 21 to 24-year-olds got £7.05 an hour and those over 25 received £7.50 of hourly wages.
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National Living Wage – This is where things get confusing. Despite this term including the words “Living Wage”, the NLW actually has nothing to do with the “Living Wage” that you often hear companies talking about (see below). The NLW is basically just a new name for the minimum wage rate but applies just to the bracket of workers aged 25 and over (the rate for workers aged 24 and under is still referred to as the NMW). The aim of the government is to raise the wages of workers aged 25 and over to £9 per hour by 2020.
The Living Wage – not to be confused with the NLW (which is the government’s National Living Wage), this is a concept that is promoted by the Living Wage Foundation but, importantly, is not enforceable by law. Rather, companies can voluntarily adopt it although it does mean paying your staff a higher sum of money. The current UK Living Wage stands at £8.45 per hour with the London Living Wage separately calculated as £9.75 per hour.
As always, for further information or to answer any other questions you may have, please drop me a line at firstname.lastname@example.org. You can also submit your startup and scaleup law questions here.