Is this another HMRC software glitch?

HMRC coming up with lower tax for low-income taxpayer

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Rebecca Cave posted an interesting article on 27/3 about glitches in HMRC Online affecting 2 groups of taxpayers. I think I may have found another. This time it produces a lower tax bill than expected. Figures as follows:

Salary £8,060 + rental profits £1,072 + CT61 interest £1,383 + dividends £8,430. Total income = £18,945 less personal allowance £11,000.

As dividends are the top slice, gross tax should be £7,945 - £5,000 = £2,945 x 7.5% = £220.87. This is from my spreadsheet, not tax software, I hasten to add.

HMRC Online came up with £117.15. What it seems to have done is taken dividends as the next slice of income after salary/rent so that £1,868 is covered by the PA. That would leave £6,562 within the tax bands. Knock off £5k and you get £1,562 x 7.5% = £117.15.

At first I thought this was a sneaky change to the rules to take away the £5k nil rate savings band for all with non-savings income of £16k or more. However, it calculates tax on the interest at 0% and still allows a deduction of £276.60 for the CT61 tax, thus giving a rebate of £159.45 instead of £55.73. An extra £103.72.

I guess we shouldn't look a gift horse in the mouth, but it looks like HMRC Online is treating dividends as the 2nd slice up to the PA, then savings income as the next slice and then the balance of dividends as the top slice. Could this be another software glitch or am I having yet another senior moment?

I know there is a clause in the legislation somewhere allowing taxpayers to vary the order income is taxed but as far as I know HMRC should stick to SAIM1090.

Of course, all this is caused by the Madness of Chancellor George. Someone might make a film about it one day. Sadly, Nigel Hawthorne is no longer with us so he cannot re-enact his role as a previous George who went mad.

 

Replies (40)

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By halblackburn
26th Apr 2017 18:18

The order in which income is taxed is unchanged, i.e. first general income, second interest, finally dividends.

The personal allowance is allowed to be allocated in a way which minimizes the tax liability. In your example the PA goes first against the general income, then as the starting rate band covers all the interest, the balance of the personal allowance goes against the dividends.

The taxable income is: interest £1,383 and dividends £6,562. The tax liability is then 7.5% x £1,562 = £117.15.

Thank you for providing an example from the real world.

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Replying to halblackburn:
By cfield
26th Apr 2017 20:50

Yes, that's how I worked it out too, but I was mystified by the dividends being split into 2 parts in the order of set-off. Allocating income to the PA in the most tax-efficient way explains that, but I couldn't see how that was reflected in SAIM1090. I guess it must be in the dividend tax rules.

Of course, in the "old" days it didn't particularly matter much, but things are much more complicated now.

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By emanresu
27th Apr 2017 14:22

I don't see any mis-ordering or splitting going on. Just the normal order of taxation.

Non-savings taxable income - using personal allowances reduces tax by 20% and leaves SRA available, so go for it. £9,132 of PA consumed, £1,868 remaining.

Savings income - part of the SRA so no point in using PA to relieve something that is already taxed at 0%

Dividend Income - less Dividend Allowance, less remaining PA leaves £8,430-5,000-1,868 subject to tax @ 7.5%. That's £117.15.

Thanks (1)
Replying to emanresu:
By cfield
27th Apr 2017 12:34

There is a change in the order of taxation as in the past it was better for your PA to be consumed by interest before dividends (as you could get a rebate for tax deducted on interest but tax credits on dividends were irrecoverable).

Now we have the reverse situation, where it is better for the PA to consume dividends before interest so long as you can still squeeze all your interest into the PA and nil rate savings band.

Certainly not complaining. I was just intrigued by the fact that this happens even though dividends are the top slice and wondered if this was correct or another glitch.

However, if you have more than £6k interest, then you are better off letting the PA consume interest before dividends, as you'd pay 7.5% on dividends above £5k but save 20% on the interest.

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Replying to cfield:
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By emanresu
27th Apr 2017 12:53

What you seem to be writing about is not order of taxation but freedom to use PA optimally. Neither of these has changed in recent years, but with recent income tax changes it is now worthwhile applying different strategies for the application of PA compared with the previous "just follow the order of taxation" approach

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By lme
28th Apr 2017 10:36

It's just too complicated. If we could just undo everything from the last 6 years we'd be in a much more sensible place. That is back to when I did my exams and started my practice, not a political point. In 6 years the legislation has gone from 5 to 9 volumes, and now we seem to be going to have 3 budgets this year...

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Replying to lme:
By cfield
28th Apr 2017 10:45

Yes, it's a constantly moving target and it's getting faster and faster. Hard to see where the goalposts are any more.

Tax planning has gone up a few gears. You can't just rely on the same basic rules for everyone now.

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By Younis
28th Apr 2017 11:40

My calculation is also in line with the OP calculation.
Tax on non-savings income £0
Tax on savings income £0
Tax on dividends £220.88

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Replying to Younis:
By Tim Vane
28th Apr 2017 11:59

Well, that calculation is wrong in law. Have a read of s25(2) ITA 2007 and have another go...

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By stt
28th Apr 2017 13:02

I've just checked and it seems Iris thankfully allocates the PA in the nost beneficial way (so gives £117.15).

As you say, HMRC systems also give the 'best' result from the taxpayers view, and I hope and expect there is test data HMRC provide to software developers to ensure there is consistency across the board.

So this is only seems to be an issue where manual or own spreadsheet calculations are performed.

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Replying to stt:
By Tim Vane
28th Apr 2017 13:12

stt wrote:

As you say, HMRC systems also give the 'best' result from the taxpayers view, and I hope and expect there is test data HMRC provide to software developers to ensure there is consistency across the board.

HMRC do not always give the most optimal answer, and some of their calculations are just plain wrong. Commercial software that blindly follows the HMRC test data will be wrong and will often overcharge tax. Hopefully most commercial software will get the correct answer in all cases even when HMRC do not.

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Replying to Tim Vane:
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By stt
28th Apr 2017 13:33

Thanks, I would be interested to know of any particular cases you have come across where HMRC give a different answer to the main commercial tax software we use.

Over the years I haven't come across any significant differences, but that may just reflect my relatively 'simple' client base.

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Replying to stt:
By Tim Vane
28th Apr 2017 13:58

Every year HMRC publish a list of issues that stop a tax return from being filed online, and which require a paper form to be filed. Many of these excluded cases are caused by HMRC not being able to correctly calculate the tax that the commercial software has computed, and so the correct answer will be rejected by HMRC. For instance, for a 2017 tax return if you enter employment income of £11,000 and savings income of £26,000 HMRC will get the answer wrong. Hopefully your commercial software will get it right (but it won't be able to file the return because HMRC will disagree with it). Rebecca Cave did an excellent article covering this on aweb last month.

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Replying to Tim Vane:
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By stt
28th Apr 2017 14:17

Thanks Tim, I am aware of that 16/17 issue, and presume (hope!) the software companies will flag those cases requiring a paper return and prevent the accidental submission of an electronic one.

I understand the above is a new (16/17) issue, and would be still interested to hear of any other cases of mismatch.

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Replying to stt:
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By emanresu
28th Apr 2017 16:00

If commercial software has passed HMRC's acceptance test then it has either slavishly copied HMRC's errors, or the acceptance test data doesn't include cases that test the faulty functionality.

We have our experience and our spreadsheets. The problem for Joe Average is that the HMRC software does not flag when it can't correctly process the data. HMRC knows the bounds of the issues other than PA optimisation so they should be able to warn that an online submission is not possible. Unfortunately, JA isn't aware of the exclusions list of 17/03/17, or the cop-out in Section 5 of SA110 2017.

You couldn't make it up!

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By itp3asso
28th Apr 2017 14:08

Bad move publishing it ! You ve blown the gaff now and they ll correct themselves for the future.

Loose lips sink snips !!

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accountant in london
By Accountant in London
25th May 2017 13:31

Hi all.
I am preparing tax return (2016/17) for a client who has significant savings income and dividend income. other then the exclusion 51 issue with HMRC, I am experiencing two different sets of tax calculation (using two different software) even using HMRC exclusions.

I will outline the details:

Here is the summary of the tax payers income:

Foreign income £32,717 (all interest from bonds)
Interest from UK securities £1,480
Dividends (gross)from UK companies £6,937
Dividend (gross) from foreign companies £17,649

Of the above, total interest received is £34,197
Total dividends are £24,586
Total income & divs received - £58,783
Deduct personal allowance of £11,000
Taxable income - £47,783

I used two different software to compare the data.
First was my old software ( i will call it F). They have been in business since mid-1990s, so old and reliable system.

F calculated the tax as follows:

Savings & interest:
£5,000*0%
£500*0%
£17,697*20%
Total income taxed : £23,197 (this is £34,197 less £11,000)

Dividend Income:
£5,000* 0%
£3,803 *7.5%
£15,783* 32.5%
Total income taxed: £24,586 (which is the total dividend income)

This software also gave me warning that there is HMRC exclusion 51 issue with this calculation and that i should either wait for an update or file correct calculations on a paper return.

It separately provided the 'correct calculation', which is:

Interest & savings =
£34,197
less £11,000 of PA
less £16,000 SRB,
less £500 for PSA,
remaining £6697 taxed at 20% BRB which is £1,339.40

Gross dividends taxed at:
£5000 * 0%
£19,586 *7.5% which is £1,468.95
(the total BRB is £31,283, so dividends of £19,586 and savings of £6697 are within the BRB)

Is this correct?

I am trying out taxfiler, its a highly recommended software here so I will mention it.

TF gave me following tax calculation and did not mention issue with HMRC 51 exclusion:

Savings & interest:
£5,000*0%
£500*0%
£26,500*20%
Total income taxed : £32,000 (should not this be £23,197?)

Dividend Income:
£5,000* 0%
£0 *7.5%
£10,783* 32.5%
Total div income taxed: £15,783 (should it not be £24,586 which is the total dividend income)

I feel, apart from the exclusion 51 issue, taxfiler has got the taxation of dividends wrong?
Happy to be proven wrong on this.

if you want screenshots of the calcs, please pm me. I can't seem to attach them here.

Thanks

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Replying to Accountant in London:
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By emanresu
25th May 2017 13:58

Accountant in London wrote:

Hi all.
Interest & savings =£34,197
less £11,000 of PA
less £16,000 SRB,
less £500 for PSA,
remaining £6697 taxed at 20% BRB which is £1,339.40

I wish that £34k+ of savings could end up with less than £7k taxable.

Too many PAs!

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Replying to emanresu:
accountant in london
By Accountant in London
25th May 2017 14:03

emanresu wrote:

Accountant in London wrote:

Hi all.
Interest & savings =£34,197
less £11,000 of PA
less £16,000 SRB,
less £500 for PSA,
remaining £6697 taxed at 20% BRB which is £1,339.40

I wish that £34k+ of savings could end up with less than £7k taxable.

Too many PAs!

I am a bit confused with all this. I think i need to look at it with clear head tomorrow. !!
So you think its not correct?

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Replying to Accountant in London:
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By emanresu
25th May 2017 14:14

I do. You can't deduct the PA twice. That £16k should be £5k.

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Replying to Accountant in London:
By Tim Vane
25th May 2017 14:21

Accountant in London wrote:
Happy to be proven wrong on this.

They are both taxing the same amount of income, it is just that Taxfiler has used the PA more efficiently and saved £150 in tax by doing so. It seems to be using the PA in such a way as to tax more of the savings and less of the dividends. This is perfectly allowable as mentioned in the posts above. I guess your older software is just not as efficient at allocating the PA?

As for the exception, I think Taxfiler will give you a warning when you try to prepare the tax return.

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Replying to Tim Vane:
accountant in london
By Accountant in London
25th May 2017 14:37

Tim Vane wrote:

Accountant in London wrote: Happy to be proven wrong on this.

They are both taxing the same amount of income, it is just that Taxfiler has used the PA more efficiently and saved £150 in tax by doing so. It seems to be using the PA in such a way as to tax more of the savings and less of the dividends. This is perfectly allowable as mentioned in the posts above. I guess your older software is just not as efficient at allocating the PA?

As for the exception, I think Taxfiler will give you a warning when you try to prepare the tax return.

Thank you for the explanation, I confirm, that TF didn't provide a warning when preparing the return for filling.

I am quite concerned that the 'correct' calculation given by F software is wrong......

Can anyone give a go at the 'correct' calculation please... my brain feels numb atm.

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Replying to Accountant in London:
By Tim Vane
25th May 2017 17:28

Accountant in London wrote:

Thank you for the explanation, I confirm, that TF didn't provide a warning when preparing the return for filling.

Hmmm. I have just put these figures you gave into the HMRC software. It came up with the same answer as Taxfiler. I would therefore expect the return to file online correctly and so the exclusion quoted is not in point.

So your older software seems to be wrong on both counts, as far as I can see. Are you going to tell us what software it is?

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Replying to Tim Vane:
accountant in london
By Accountant in London
25th May 2017 18:43

Tim Vane wrote:

Accountant in London wrote:

Thank you for the explanation, I confirm, that TF didn't provide a warning when preparing the return for filling.

Hmmm. I have just put these figures you gave into the HMRC software. It came up with the same answer as Taxfiler. I would therefore expect the return to file online correctly and so the exclusion quoted is not in point.

So your older software seems to be wrong on both counts, as far as I can see. Are you going to tell us what software it is?

Yes thank you about the exclusion warning.
As a test i added some employment income to the total income figures and Taxfiler did show the exclusion warning.

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Replying to Tim Vane:
accountant in london
By Accountant in London
28th May 2017 16:27

I will try to update the F software. Unlike taxfiler which updates itself, for F software i usually get a once a month update warning. Maybe i should try to update it first. there may be an update which i have not downloaded yet.

Edit: updated the software. No change to the calcs.

The F is Forbes.

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By cfield
25th May 2017 16:43

Income within the HRB = £58,783 - £43,000 = £15,783.
If you use the PA against dividends, that leaves £8,586 taxable at 32.5%. Hence, the whole £11k PA potentially saves tax at 32.5%.

He gets the full £5k savings band anyway, regardless of how the PA is used, as his interest exceeds £16k and he has no earned income.

Therefore, we have total tax free income of £21,500 either way, leaving £37,283 to be taxed. The only issue is how we want that income to be taxed.

If the PA is used on interest, he has £17,697 interest x 20% + £3,803 dividends x 7.5% + £15,783 dividends x 32.5%. Total tax bill = £8,954.10.

If the PA is used on dividends, he has £26,500 interest x 20% + £2,197 interest x 40% + £8,586 dividends x 32.5%. Total tax bill = £8,969.25.

So interest beats dividends by £15.15. This is the net of 4 figures, 2 plus and 2 minus.

On the plus side, we have £8,803 less income x 20% and the £2,197 x 40%. That saves him £2,639.40.

On the minus side, we have £7,197 more income x 32.5% and the £3,803 x 7.5%. That costs him £2,624.25.

Hey presto, plus beats minus by £15.15. Only trouble is, it's cost me more than £15 worth of my time to work all this out!

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Replying to cfield:
By cfield
25th May 2017 15:42

Damn, now Tim says the tax saving is £150 not £15. Back to the drawing board!

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Replying to cfield:
By cfield
25th May 2017 16:39

Got it. The optimal allocation of the PA is £8,803 dividend and £2,197 interest.

This keeps interest fully within the BRB and means the £5k dividend allowance falls fully within the HRB.

The split of the £37,283 taxable income is now £26,500 interest x 20% + £10,783 dividends x 32.5%. Total tax bill now £8,804.47 which is £150 less than I said earlier. Just like Tim said.

The key thing is clearly to ensure the whole £5k dividend allowance saves tax at 32.5% not 7.5%, if possible to do so, and also to ensure the whole £5k savings rate band is applied to interest, at least to the extent that sufficient interest is available.

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accountant in london
By Accountant in London
25th May 2017 17:05

Its seems software F is keeping the type of income separate i.e. Savings and Dividends, and then allocating the allowances and thresholds. This would be the method to use if we still had the 10% dividend tax credit, as dividend income had to stay separate.

In 2016/17, with the intro of £5k dividend allowance, there is no need to distinguish between other income/savings and dividends.
Hence the method used by taxfiler, to lump dividend income within the BR band and tax the remaining dividends at 32.5% after deducting £5k of the div allowance.

What i don't understand is that why the software providers have different calculations? If they followed HMRC guidelines then should they not be the same - even if the guideline (i.e. the exclusion 51) which is wrong at the moment?!

Many thanks for everyone for taking the time to reply here.

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Replying to Accountant in London:
By Tim Vane
25th May 2017 17:32

Accountant in London wrote:

What i don't understand is that why the software providers have different calculations?

Well, only one calculation is technically correct. Your old software was wrong about the tax liability, and wrong that it was an excluded case (which it isn't).

I suspect that most of the software out there is actually correct, and it is just the first software you used that is wrong.

Thanks (1)
Replying to Tim Vane:
accountant in london
By Accountant in London
25th May 2017 18:48

Tim Vane wrote:

Accountant in London wrote:

What i don't understand is that why the software providers have different calculations?

Well, only one calculation is technically correct. Your old software was wrong about the tax liability, and wrong that it was an excluded case (which it isn't).

I suspect that most of the software out there is actually correct, and it is just the first software you used that is wrong.

Thank you for this.
I added some employment income to the mix as a test, and Taxfiler did show the exclusion warning.

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accountant in london
By Accountant in London
25th May 2017 17:32

I have just read this thread on ICAEW. Members may find it helpful.
https://ion.icaew.com/taxfaculty/f/tax-news---forum/2674/interest-and-di...

In keeping with the rule to optimally use the PA.
In my example, since there is no earned income, can we go down this route:

Savings income:

SR 5,000 *0%
SA 500 *0%
28,697 *20%
Total savings income taxed - £34,197

Dividend income:
PA 11,000 *0%
Div allowance £5,000 *0%
£3,303 * 7.5% (£32,000 less £28,697)
£5,283*32.5%
Total div income taxed £24,586

Total tax due is £7,704.09

which is £1,000 less than £8,804. !!

Is this route wrong in this scenario?

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Replying to Accountant in London:
By Tim Vane
25th May 2017 17:37

Accountant in London wrote:

Is this route wrong in this scenario?

Yes, because the basic rate band is only £32,000, not £37,000. You have £5,000 in the basic rate band that shouldn't be there!

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Replying to Tim Vane:
accountant in london
By Accountant in London
25th May 2017 17:56

Tim Vane wrote:

Accountant in London wrote:

Is this route wrong in this scenario?

Yes, because the basic rate band is only £32,000, not £37,000. You have £5,000 in the basic rate band that shouldn't be there!

oops! Thanks for point it out.
Don't have enough brain cells today!

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By emanresu
26th May 2017 16:23

Once again, A-i-L you are double-using allowances.

You only use the PA once - that was your previous error. Now you're trying to double-use the SRA. The SRA (and the PSA) reduce the BRB.

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By emanresu
27th May 2017 20:04

@cfield

"Salary £8,060 + rental profits £1,072 [i.e. 9132] + CT61 interest £1,383 + dividends £8,430. Total income = £18,945 less personal allowance £11,000."

How about £9,132 of the PA applied to the non-savings income - so no tax liability there. The SRA and the PSA more than covers the savings income - so not tax there, either. The remaining £1858 of the PA plus the £5k DA more than covers the dividend income.

Have I missed something? - It sounds too good to be true!

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Replying to emanresu:
By cfield
27th May 2017 20:31

Since when did £1,858 + £5,000 more than cover £8,430 dividends?

You're also £10 out on the £1,858. Last time I looked, £11,000 - £8,060 - £1,072 = £1,868.

So £1,562 of dividends is taxed at 7.5%.

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Replying to cfield:
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By emanresu
27th May 2017 20:50

And when I looked again, it WAS £1860. My bad typing/eyesight (error in in entering data to the software, error in transcribing software's output). Not my finest hour.

I agree - sorry, my software agrees - with £117.15.

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By emanresu
27th May 2017 20:38

@Accountant in London

"... total interest received is £34,197
Total dividends are £24,586"

Apply full PA, SRA and PSA of £500 to the savings income (total £16,500) to the taxable savings, leaving 17,697 to be taxed at 20%.

Apply DA to dividend income, leaving £8,803 to be taxed at 7.5% and £10,783 to be taxed at 32.5%.

£17,697 @ 20% £3,539.4
£ 8,803 @ 7.5% £ 660.23
£10 ,783 @ 32.5% £3,504.48

Total £7,704.11

I've rounded up figures, explaining the penny or two's difference. The point I'm trying to make is that there's no need for the jiggery-pokery order of taxation or order of application of the PA issues that seem to affect HMRC and some of the software firm's approach and reporting.

Unless I'm missing something!

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Replying to emanresu:
accountant in london
By Accountant in London
28th May 2017 15:46

Thank you

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