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Does Trader Get Tax Deduction If Doesn't Bear Cost

Mum Pays Power Bills and Rent for House Partly Used for Son's Trade Without Expecting Reimbursement

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Trader son has gone through some hard times. His mum has supported him financially in a number of ways.

Have just found out that mum has been paying son's domestic gas and electric bills and rent for his house. Part of son's house is used for trade purposes, so part of the electric used in his house for his trade machinery is consumed for business purposes. And part of the rent paid relates to the business-use area of the son's house.

So son has not borne any of the electric or rent expense costs, as it is all paid for by his mother who does not want or expect reimbursement from her son.

Would it be safe to assume the business element of the electric and rent costs could be treated as tax-allowable expenses of the son's trade with a corresponding credit to capital in the accounts.

What ye think?

Replies (50)

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By noodles
20th May 2022 05:57

I would ask him the number of hours a month he works from home, and then put the allowance through based on that. Maximum would be £312 pa.

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Replying to noodles:
By Duggimon
20th May 2022 09:41

Really? I wouldn't do that, if I have a client who works solely or primarily from home I work out a reasonable apportionment of the bills, which generally always works out more favourably for them, so it would seem remiss to do anything else.

OP, unless the bills are switched to be in the mother's name I see no reason he wouldn't get tax relief. What has happened with her paying the bills is in fact indistinguishable from her giving him money and him paying the bills with it.

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Replying to noodles:
By JCresswellTax
20th May 2022 10:12

Wouldn't do that. Claim is likely to be a lot lower than working out actual costs and claiming a percentage.

This seems like a lazy alternative.

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By Tax is always taxing
20th May 2022 08:40

I agree with noodles - although depends on the scale of this "trade" and machinery at home I suppose.

But nothing you have said regarding his mum paying the bills would change any treatment I had done before. She has effectively loaned or gifted her son the money - if its for business expenses they are still business expenses, i would be treating it as if he had paid the money.

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By Justin Bryant
20th May 2022 10:10

Surely the GAAP accounts are the starting point here. If no expenses are there in the 1st place (as it's essentially a gift from mum), they can't be W&E in the 1st place.

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Replying to Justin Bryant:
By JCresswellTax
20th May 2022 10:13

Surely the expenses are still incurred?

Because they are paid for by gifted funds does not mean they weren't incurred in the first place.

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Replying to JCresswellTax:
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By RetiredTax
20th May 2022 10:35

I agree. This differs from ITEPA where the E'ees expense needs to be incurred AND "defrayed out of the emoluments" (as per old Act- I had to study !!)

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Replying to JCresswellTax:
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By Justin Bryant
20th May 2022 11:21

Unless they are in the P&L in the 1st place, how can they be W&E incurred in the 1st place is my point. This is supported by this SC case re (supremacy of) accounting treatment: https://www.supremecourt.uk/cases/uksc-2020-0125.html

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Replying to Justin Bryant:
By JCresswellTax
20th May 2022 12:23

Why wouldn't they be in the P&L? They were incurred so will be in the P&L.

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Replying to JCresswellTax:
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By Tax Dragon
20th May 2022 12:32

Incurred but not paid/borne (by the business).

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Replying to Tax Dragon:
paddle steamer
By DJKL
24th May 2022 15:48

Why does one need payment by cash? If I enter into an excambion deal , swapping land, nothing is paid yet the transaction gets booked at the market value of the exchange. What about if I both buy and sell from you and we contra ledger balances?

And the prime entry into the books for virtually all purchases is traditionally via a purchase ledger, Dr Cost, Dr Vat, Cr Creditor.

What the relative in this instance has paid is the creditor that arose from the business incurring the expense W & E for the purpose of its trade, the relative paid no doubt for personal reasons not business reasons as a shortcut loan, so I see no harm in posting DR Creditor, Cr DLA as that is most likely the substance of the transaction. If not it is then surely Dr Creditor Cr Loan from relative at which juncture the relative can gift said loan to the family member.

Edit- Assumed this was son's cost, now it transpires it was not this answer does not apply, however had it been his cost I would argue payment is not needed for the cost to be recognised unless cash accounting involved. (Not that I like contras but they clearly show monetary cash payment is not always needed)

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Replying to DJKL:
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By Tax Dragon
24th May 2022 16:36

There is no loan. There never was a loan. Read the question. There is simply a payment of a bill by a donor. The end.

The accountant's knee-jerk "surely... Cr Loan" cannot create something that never existed. In other words, it's wrong. (Or so it seems to me - obviously I mean in the case where you have had Dr Cost Cr Creditor to start with, acknowledging you don't even get that far with the lecky in this case.)

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Replying to JCresswellTax:
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By Justin Bryant
20th May 2022 13:58

It's a question of fact. If there is a creditor to mum or mum has been paid it will presumably hit the P&L, but not otherwise (e.g. a gift from mum will not hit the P&L as an expense).

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By Tax Dragon
20th May 2022 11:29

I am not an accountant but it seems to me legitimate to include the business expense in the business accounts. Of course you would then have to include as business income the amount that someone (here, Mum) has contributed to pay that expense. Which pretty much brings you back to Justin's answer.

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Replying to Tax Dragon:
Danny Kent
By Viciuno
20th May 2022 12:11

But is it really business income? Or just a mum helping out her son (so capital introduced or DLA).

If I win £100 in the lottery and use that to pay business expenses does that make it the £100 taxable? Or the £100 deduction not tax-deductible.

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Replying to Viciuno:
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By Tax Dragon
20th May 2022 12:20

As I understand the question, Mum is paying the business expense directly. That's different, obviously, from your lottery example. It's also different from Mum giving son cash and son spending same as he sees fit - but if that is what is happening, the question is very badly worded.

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Replying to Tax Dragon:
By penelope pitstop
20th May 2022 14:39

Have just clarified the position with client. I had thought the electric bill was in his name.

As it turns out, the electricity account is in his mother's name, so she is merely settling an electric account in her name albeit for electric supplied to her son's rented house.

But the trader son is consuming electricity for the purpose of his trade, although his mum pays for it.

To bring an IHT slant into things, mother's estate diminishes each time she pays an electric bill. Son's estate on the other hand does not diminish as it should do, so the payment by mother seems to be akin to periodic gifts to son (maybe enjoying the IHT "gifts out of surplus income" exemption).

I had assumed it was merely a case of:

debit electric expense
credit capital introduced

but earlier responses seem to muddy the waters

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Replying to penelope pitstop:
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By Tax Dragon
20th May 2022 14:47

My suggestion (recognising income and an equal and opposite expense) is similar to SORP. Doesn't apply, you say? No more irrelevant here than is IHT.

But I suspect Justin is right - business doesn't have an expense and it goes nowhere near a true and fair set of business accounts. (Usual caveat: IANAA.)

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Replying to penelope pitstop:
By Duggimon
20th May 2022 14:51

In light of this new information I would very much rescind my original opinion and now agree this is not a business expense. The bill is not incurred by the business for any reasonable definition of incurred.

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Replying to penelope pitstop:
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By Tax Dragon
20th May 2022 14:53

penelope pitstop wrote:

mother's estate diminishes each time she pays an electric bill.

Why? It's her bill. (Please don't give these people IHT advice!)

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Replying to Tax Dragon:
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By More unearned luck
23rd May 2022 18:29

Penny is merely wrong about settlement of the bill being the moment of diminishment; Mum's estate is diminished every time the son switches on the kettle or a light. If Mum has an app on her phone connected to the son's smart meter she can see her wealth diminish in real time.

It might count as normal expenditure out of surplus income.

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Replying to More unearned luck:
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By Tax Dragon
23rd May 2022 23:24

Sure, just as her IHT estate diminishes each time she makes herself a mug of tea.

Not every diminishment is a transfer of value.

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Replying to penelope pitstop:
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By suepg
23rd May 2022 12:21

IHT? Please don't be providing IHT advice to anyone.

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Replying to penelope pitstop:
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By Mr J Andrews
23rd May 2022 17:14

So; the son lives in a rented house.
The mum is the electricity account holder for the son's rented house.
Any more clarifications to complicate further ??

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Replying to Tax Dragon:
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By TASG
24th May 2022 15:13

It would be a "capital contribution reserve" contribution if son was a company owned by another company. Not income, and certainly not taxable income.

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Replying to TASG:
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By Tax Dragon
24th May 2022 15:36

Well, as you know by now, IANAA, so I've never even heard of ICAEW Technical Release 02/17, let alone read it. But I know enough to know that yours is one helluva claim. And (imho) almost certainly not a correct one [at least, not the "certainly not taxable" bit]. But I will have to kowtow to folk who have heard of - and read - the TR; if others say you are right and I am not, then I won't disagree. (Of course, it's not remotely relevant to the OP - but that shouldn't stop it being discussed. This forum thrives on discussion, as Justin unintentionally highlights below.)

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By sammerchant
23rd May 2022 12:20

I believe that the son may claim the costs as part of his business expense.

I had an instance where a father kitted out his son's office - PC, printer, copier, desks, filing cabinets etc. I spoke with HMRC and they agreed that these would constitute the son's fixed assets and he would be able to claim CAs on them.

I see no real difference her.

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Replying to sammerchant:
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By Tax Dragon
23rd May 2022 12:38

sammerchant wrote:

I see no real difference her.

Your discussion with HMRC didn't mention s14 CAA 2001?

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Replying to sammerchant:
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By bigdave1971
23rd May 2022 12:40

If you introduce assets to a business then it will get tax relief, I'm not sure if you can also include them as fixed assets unless you have actually paid for them.

If someone pays your home bills (directly to the supplier) then you haven't incurred anything for them and so how can you apportion the costs?

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Replying to sammerchant:
By Duggimon
24th May 2022 09:01

sammerchant wrote:

I see no real difference her.

Well then that's where we differ. The mother has an account with the electricity supplier for a domestic residence. She is billed for and pays the amounts due on that account.

In what sense can this be an expense of the business and relievable against tax? The business has no liability to the electricity company and makes no payment. Instead the business receives a free supply of electricity from the mother.

The fact that plant and machinery brought in to a business as the result of a gift can still attract capital allowances has absolutely no bearing.

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Replying to Duggimon:
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By Tax Dragon
24th May 2022 09:32

Duggimon wrote:

The fact that plant and machinery brought in to a business as the result of a gift can still attract capital allowances has absolutely no bearing.

Yeah, tax analysis by analogy/extension is the worst sort of tax analysis. (But can you show me an Awebber that hasn't done similar at some time? I plead guilty to that charge.)

Duggimon wrote:

The business has no liability to the electricity company and makes no payment.

To clarify (as this was the question in the OP), do you now agree that a business must both have a liability and make a payment in order for tax relief to be due? If the business has a liability but said liability is relieved or removed without the business having made a payment, what is the tax position?

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Replying to Tax Dragon:
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By Hugo Fair
24th May 2022 09:49

Won't that potentially depend on how "liability is relieved or removed without the business having made a payment" ... e.g. payment by disinterested 3rd-party, payment by interested/connected 3rd-party, via barter (or does that constitute payment by the business), straightforward cancellation of liability by issuer, and so on?

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Replying to Hugo Fair:
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By Tax Dragon
24th May 2022 10:05

Potentially. In that you might recognise the income and allow a corresponding expense or you might de-recognise the liability. Is there a valid third alternative?

Barter is payment, yes. (So recognise the income and the expense.)

Edit: I know I am conflating tax and accounts in these last few comments. But (as Justin said) the one informs the other.

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Replying to Tax Dragon:
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By Hugo Fair
24th May 2022 10:22

Well we are, as they say, on the same page then - and I'm definitely in the "a business must both have a liability and make a payment in order for tax relief to be due" camp.

Is there a valid 3rd alternative? The mathematician in my brain says no (using set theory), but ... a landlord provides a 2-year rent holiday in return for which the rent on the remaining 3 years of the lease is doubled (so short-term liability vaporized without any immediate payment being made)?

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Replying to Hugo Fair:
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By Tax Dragon
24th May 2022 12:31

IANAA. So I'm allowed to be dumb here (even if that offends Justin).

What would happen in your landlord scenario? Would you de-recognise the 'old' liability and account for the new one? Or... pass. What should you do?

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Replying to Tax Dragon:
By Duggimon
25th May 2022 09:15

Tax Dragon wrote:

To clarify (as this was the question in the OP), do you now agree that a business must both have a liability and make a payment in order for tax relief to be due? If the business has a liability but said liability is relieved or removed without the business having made a payment, what is the tax position?

In the specific situation described in the OP, with the one change being that the liability to the expense was incurred by the business rather than by the mother, I would still see tax relief as being due. I would certainly include it in the accounts if the electricity bills were a cost of the business and I don't see that having the mother settle them would remove them from the tax side of things either.

A gift of cash to the son used to pay the bill, and a payment of the bill by someone to whom it was not addressed can't reasonably be treated differently for tax, can they?

I am presuming you would agree that if the mother gave her son £100 which he used to pay the electricity bill addressed to his business, you would agree that is deductible for tax purposes.

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Replying to Duggimon:
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By Tax Dragon
26th May 2022 09:46

Duggimon wrote:

I am presuming you would agree that if the mother gave her son £100 which he used to pay the electricity bill addressed to his business, you would agree that is deductible for tax purposes.

Yes of course. She gives cash; he decides what to do with it. No-one has disputed that analysis (tax or accounts) that I've noticed.

Duggimon wrote:

A gift of cash to the son used to pay the bill, and a payment of the bill by someone to whom it was not addressed can't reasonably be treated differently for tax, can they?

Those are two entirely different transactions. I have no difficulty conceiving that the tax treatment could be different. "The substance of the transaction" (to borrow a phrase) in the case of a cash gift is the provision of cash. The substance of the transaction if your business uses electricity billed to me is the provision of (free-to-you) electricity.

So....

sammerchant wrote:

I am struggling to see why we don't look beyond the cosmetics to get to the substance of the transaction.

is the substance if I pay your electricity bill (or your rent) that I have given you cash? Or is it closer to me giving you electricity (or accommodation)?

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Replying to Tax Dragon:
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By sammerchant
25th May 2022 09:16

What if the mother had guaranteed the payment? Supposing the son had given the supplier a Bill of Exchange (endorsed by the mother) in payment?

I am struggling to see why we don't look beyond the cosmetics to get to the substance of the transaction.

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By Justin Bryant
24th May 2022 10:50

It's bad enough that HMRC does not understand basic double entry bookkeeping and accounting and some of the above comments are proof of how the quality of this forum (of accountants and tax advisers no less) has basically gone to pot.

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Replying to Justin Bryant:
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By Tax Dragon
24th May 2022 11:34

That's the first thing you've said on this thread that I disagree with. People have to be 'allowed' to say things that are 'wrong' or all discussion in here will cease. I think the forum would be a poorer place without discussion - even though that means having to tolerate nonsense posts... like yours... and now mine.

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By TASG
24th May 2022 15:26

In HMRC v NCL Investments Ltd and another [2022] UKSC 9 paragraphs 38 -42 the supreme court held that expenses can be incurred under GAAP and for tax purposes without being paid.

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Replying to TASG:
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By Tax Dragon
24th May 2022 15:47

The irony of course is that that is the very case Justin pointed to above (re the supremacy of accounting rules when there is no express tax rule to the contrary).

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Replying to TASG:
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By Justin Bryant
24th May 2022 17:47

The irony of course is that your above comments confirm my above point (in your case and TD's at least plus the person who "Thanked" you). I mean, do you really both think that SC case confirms that something that (justifiably) never hits the P&L and never will can be tax deductible*? I despair (it's not even a so-called "tax nothing" if it ain't in the accounts).

*assuming it's not a statutory relief like CAs, R&D credits etc.

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Replying to Justin Bryant:
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By Tax Dragon
24th May 2022 17:41

Neither TASG nor TD said any such thing. Though if tax statute provided a deduction for something that wasn't in the P&L then I guess TD would say a deduction was due. AIA, maybe? Pt12 CTA 2009, perhaps?

But it would seem from your comment that either you didn't read what TASG said or (ironically) you haven't read HMRC v NCL Investments Ltd and another. And since (your one petty comment... erm, now two petty comments... aside) I have agreed with you throughout the thread, I'm not sure what you have (mis)read into what TD has said. Feel free to be specific - if you are capable of that.

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Replying to Tax Dragon:
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By Justin Bryant
24th May 2022 17:51

As usual I don't know what you're on about (and obviously I meant subject to any statutory relief - being the exception that proves the rule), but if you agree with me that's good enough I suppose.

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Replying to Justin Bryant:
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By TASG
09th Jun 2022 12:02

The receipt of value from the mother was in the context of a familial relationship rather than a trading receipt in connection with a property business. She was gifting her son some electricity. It does not belong on the P&L.

The expenditure, however, was a cost connected with the operation of the property business. It does belong on the P&L.

The double entry would be Cr capital introduced, Dr Cost of Utilities.

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Replying to TASG:
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By Justin Bryant
09th Jun 2022 12:10

A family gift of gas & lecy ain't consideration for anything and it's ridiculous to say that a company should recognize such gifts as capital introduced.

It's like saying if you steal gas & lecy from your local utility company you should show it in the accounts!

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Replying to TASG:
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By Tax Dragon
09th Jun 2022 12:17

TASG wrote:

The expenditure, however, was a cost connected with the operation of the property business.

There was no expenditure, no cost. Mum gifted electricity; the business didn't need to buy any.

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Replying to Tax Dragon:
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By Justin Bryant
09th Jun 2022 12:20

Well done and logical for once!

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Replying to Justin Bryant:
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By Tax Dragon
09th Jun 2022 12:25

Back atcha.

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