Tax-free savings and "taxable income"

Tax-free savings and "taxable income"

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Hello all,

I've just seen the changes to interest income for 2015-16: https://www.gov.uk/apply-tax-free-interest-on-savings/changes

From 6th April, if your taxable income is under £15,600, and your taxable interest income is below £5,000, you pay no tax instead of a starting rate of 10%.

What I'm wondering is whether this will basically mean company directors on a personal allowance salary pay no tax at all on interest income. Currently, if you're a company director with interest income, you can benefit from the 10% starting rate even if you have substantial dividends income, because interest income is taxed prior to dividends income. Will this continue to be the case, or will they include dividends income in "taxable income"? 

HMRC's savings helpline staff aren't answering calls, so if anyone knows that would be great. (Thanks Conservatives for helping successful business people avoid even more tax...)

Replies (58)

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By cbp99
07th Mar 2015 13:07

Agree

My understanding is the same as yours, and in the situation you describe, there would be no tax on the interest.

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James Reeves
By James Reeves
07th Mar 2015 15:01

Surely not

"Currently, if you're a company director with interest income, you can benefit from the 10% starting rate even if you have substantial dividends income"

Sorry, I can't see how the starting rate even comes into play if you have substantial dividends. Can you give an example?

EDIT - sorry, just re-read your post, and I see what you mean. Yes I get what you are saying, if you have more than £10,000 interest income.

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By Psyche
07th Mar 2015 15:17

Starting rate

James: No, what I mean is that the way income is currently taxed, non-savings income is taxed first, then savings income, then dividends income. This means that, for the current tax year, if you are a company director earning £10,000 per year, with £250 bank interest income and £40,000 in dividends, the personal allowance is applied to the £10,000, the interest income is taxed at the 10% starting rate, and then the dividends are taxed at 10% / 32.5%. Which means that someone with an income over £50,000 is nevertheless paying only 10% on their bank interest.

I'm wondering if the new scheme means the above company director will now pay no tax at all on their savings income, or whether dividend income will be included to ensure the benefit goes to actual low-income people rather than company directors who take most of their pay as dividends.

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James Reeves
By James Reeves
07th Mar 2015 15:19

No it's not

No, the personal allowance is applied against earned income and then interest income before the dividend income. So no 10% rate applies in that case (except the dividends themselves are 10%, covered by the tax credit)

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By Psyche
07th Mar 2015 15:24

Yes it is

That's exactly what I said. 

https://www.gov.uk/apply-tax-free-interest-on-savings/10-savings-rate

My question is whether this will continue, ie dividends income is excluded from "taxable income" when determining who is eligible for the new 0% starting rate on bank interest.

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James Reeves
By James Reeves
07th Mar 2015 15:31

You've lost me

Sorry, I still don't see how the 0% rate helps if you have substantial dividends. Can you put some numbers to it?

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By Psyche
07th Mar 2015 15:38

OK.

For 2015-16, you take £11,000 in salary from your limited company. You earned £250 from interest and you paid yourself £50,000 in dividends.

Based on this advice, https://www.gov.uk/apply-tax-free-interest-on-savings/changes

Your non-savings and interest income adds up to £11,250. Therefore you pay no tax on your savings income, despite having a total income of £61,250, because dividends are taxed AFTER non-savings and savings income.

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James Reeves
By James Reeves
07th Mar 2015 16:27

Got you!

OK yes sorry. Me again not reading your posts properly. I missed the part of your original post where you talked about the BR salary, so was thinking you'd need a lot of interest to cover the PA. But yes, as far as I can see that's right. There's nothing in the draft legislation that I remember that alters the calculation. Standard director fare - pay BR salary and divs and the "middle bit" will be tax free for savings interest. You can't apply for an interest free account but you can make an SA claim to get it back (or presumably R40 if you are a director who is not in SA).

Apologies for being slow - trying to multi-task and failing miserably.

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By Psyche
07th Mar 2015 16:49

No problem

Company directors all have to file self assessment returns anyway, so they can just get their refunds then.
And then, ideally, pay them to charities helping the poor people the Conservatives have screwed over in order to give us this tax break. That's what I'm going to do with mine, anyway.

 

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By Psyche
07th Mar 2015 17:49

Can of worms?

Oops, have I inadvertently walked into a minefield?

I'll amend: "I prepare self assessment returns for all my company directors anyway." So I won't bother to advise them to file Forms R85.

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By JimH
07th Mar 2015 18:32

Interest rates
How many are actually earning any interest on savings these days? So there's some mileage in owner managers lending to personal companies, charging a 'commercial' rate for a tax arbitrage?

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By Psyche
08th Mar 2015 15:42

Me, for one...

Interest rates are rising, some banks are paying 5% on current accounts.
Admittedly this may affect me more than any of my clients!

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Replying to johngroganjga:
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By emanresu
09th Mar 2015 15:45

Interest rates are rising?

Psyche wrote:

Interest rates are rising, some banks are paying 5% on current accounts.
Admittedly this may affect me more than any of my clients!

Do tell.  I'd be interested to hear of any savings / bank account interest rates that have risen in, say, the last six months.  All I've seen change have fallen.  New offerings - NS&I 65+ bonds (which we heavily subsidise), apart - pretty much the same.

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By Psyche
09th Mar 2015 16:53

Interest rates rising

Lloyds: Club Lloyds pays 4% on balances between £4,000 and £5,000, pay in £1,500 per month. (Used to be 5%, guess I got in at the right time!) http://www.lloydsbank.com/current-accounts/club-lloyds.asp

TSB: 5% interest on current account balances up to £2,000 with switching, pay in £1,000 per month. http://www.tsb.co.uk/current-accounts/switching-bank-account/?WT.ac=A00013

First Direct and Marks & Spencer each do a monthly saver account, 6% interest, pay in up to £300 per month (£250 at M&S).

If you have one of each, that's about £500 per year, tax free at the 0% starting rate.

*goes to open M&S saver account*

[EDIT] Nationwide have a current account that pays 5% on balances up to £2,500 for the first 12 months as well.

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Replying to Lone_Wolf:
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By Psyche
09th Mar 2015 16:50

M&S account

Hmm, in order to get the M&S saver account, it requires a current account with a fee of £10 per month. So guess you come out even there. 

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Replying to Lone_Wolf:
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By emanresu
09th Mar 2015 18:01

Interest rates are rising?

Psyche wrote:

Lloyds: Club Lloyds pays 4% on balances between £4,000 and £5,000, pay in £1,500 per month. (Used to be 5%, guess I got in at the right time!) http://www.lloydsbank.com/current-accounts/club-lloyds.asp

TSB: 5% interest on current account balances up to £2,000 with switching, pay in £1,000 per month. http://www.tsb.co.uk/current-accounts/switching-bank-account/?WT.ac=A00013

First Direct and Marks & Spencer each do a monthly saver account, 6% interest, pay in up to £300 per month (£250 at M&S).

If you have one of each, that's about £500 per year, tax free at the 0% starting rate.

*goes to open M&S saver account*

[EDIT] Nationwide have a current account that pays 5% on balances up to £2,500 for the first 12 months as well.

 

Not to mention Santander 123, Bank of Scotland Vantage and HSBC 6% regular saver - HOWEVER:

 

Not a word of this is evidence that "Interest Rates are rising".

You're making, then expanding on the need for small savers to recognise that, currently, they'll get a better return in bank current accounts than in savings accounts.  I've no problem with that, but that is NOT evidence that interest rates are rising.

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By Psyche
10th Mar 2015 13:55

OK pedants

"Rates of interest paid by some banks on non-ISA accounts are rising."

 

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Replying to fawltybasil2575:
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By emanresu
10th Mar 2015 14:41

Really?

Psyche wrote:

"Rates of interest paid by some banks on non-ISA accounts are rising."

Still you produce no examples.  Just asserting something doesn't make it so.

Neither does re-asserting it.

 

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By Psyche
10th Mar 2015 16:12

Examples?

Hello, I just gave you several!

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Replying to pauljohnston:
By Tim Vane
10th Mar 2015 16:16

But...

Psyche wrote:

Hello, I just gave you several!

Your very first example shows an interest rate going down, thus illustrating exactly the opposite point to the one you were making.

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Replying to johnt27:
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By emanresu
10th Mar 2015 17:23

Interest rates are rising?

Tim Vane wrote:

Psyche wrote:

Hello, I just gave you several!

Your very first example shows an interest rate going down, thus illustrating exactly the opposite point to the one you were making.

 

Thank you, Tim.  I was beginning to believe - well, I don't know what.

@Psyche:

Lloyds Vantage current account:  Now 1.5%. This time last year 3%, so DOWN

Club Lloyds current account:  well, as Tim points out, you've already marked that as a DOWN

HSBC 6% Regular Saver:  was 8% last year, 10% the year before, so DOWN

Clydesdale/Yorkshire Bank:  Now 2%. This time last year 4%, so DOWN

And none of those have spiked, they've just gone down

Santander 123 and TSB current accounts have held their rates but have reduced the amount of money that interest can be earned on.

Where ARE you coming from, Psyche?

 

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By JimH
10th Mar 2015 16:34

so any takers?

For lending those savings to a company for business purposes at bank base rate + % interest. Company gets the tax deduction when paid.  Owner manager's interest received is sheltered by the new 0% band. Not really worth it, is it.

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By Psyche
11th Mar 2015 17:05

There haven't been any 8% interest rates in MANY years.

Guess I got in early on these nice accounts. Don't be mad at me because you didn't.

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Replying to Duggimon:
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By emanresu
11th Mar 2015 18:25

Remarkable

Gosh, I've met many manifestations of ignorance, but for sheer persistence, you take the biscuit, Psyche.

Psyche wrote:

There haven't been any 8% interest rates in MANY years.

http://goo.gl/VfCB7x

Psyche wrote:

Guess I got in early on these nice accounts. Don't be mad at me because you didn't.

Well, I thought that I might not have spotted them all - hence my challenge to you to identify one that I might have missed.

Nothing but my time wasted

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By robobhoy
13th Mar 2015 12:20

Sore head!

I'm getting a sore head trying to follow this thread!

Did anyone answer the original question?

IS DIVIDEND INCOME INCLUDED IN THE 'TAXABLE' INCOME LIMIT OF £15600???

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By The Minion
13th Mar 2015 13:37

just as an aside (while waiting for answer to robobhoy question)

If you get your electric from OVO energy they pay 3% "interest" on the amount you have in credit with them.

 

The " "s are because when i asked if i had to declare it they said that it wasn't really interest its just that was what they were calling it so it wasn't taxable at all...

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By robobhoy
13th Mar 2015 14:55

Please.....

......my sore head won't go away until someone answers my question!

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By The Minion
13th Mar 2015 15:01

I must admit

he first time i saw this a few months back i thought brilliant but then when i checked i thought it mean that ALL income had to be less than £15k.

 

Obviously DELIGHTED to be proven wrong...

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paddle steamer
By DJKL
13th Mar 2015 15:18

Far more than 8% but limitations

There is always (i think it still pays) the Bank of Scotland current account that pays you  a £5 reward (net) if you lodge £750 in the month and have 2 D/D payments and stay in credit for the month. Given you do not need to keep the funds in the account you could set up two of your  d/d payments to go out same day/next day. Effective rate if funds retained one day a month average balance circa £25. Interest gross £72, so we have a bit over 275%.

I have two of these accounts and have have been tempted to set up a whole circle of them and spread my D/D payments amongst them like Noah , two by two.

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Replying to seeleyharris:
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By emanresu
13th Mar 2015 17:02

@DJKL

Indeed, as also in Halifax Reward Current Account.  Mind you, there was a flip side to this - at least when this account first came out.

If you went one penny overdrawn for one night, the charges they rendered were equivalent to an APR of approximately 35,000% !

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Replying to RedSquirrel:
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By robobhoy
13th Mar 2015 17:03

So, dividend income is not included in the £15600?

That's quite a good deal then.

Planning opportunity!

 

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By emanresu
13th Mar 2015 17:37

The core of the issue...

... seems to me to be the following paragraph from HMRC's TIIN 8073 8076 issued after the 2014 Budget and commenting on the ITA

"Section 16 provides the ordering rules which determine at what rate income is taxable. Sections 16(3) to (5) provide that dividend income is the top part of an individual's taxable income (it is taxed last), savings income the middle part, and other income the lowest part (it is taxed first). The effect is that, should an individual’s taxable non-savings income in a year exceed the starting rate limit for savings, the starting rate for savings will not apply. However, should their taxable non-savings income in a year be less than the starting rate limit, this savings income will be taxable at the starting rate, up to the starting rate limit."

As has always been the case, HMRC uses an ambiguous term - this time it's "taxable non-savings income" - the result of which being that it is impossible to be sure that - for the purposes of deciding the applicability of the savings starting rate - the Section 16 ordering rules aren't being set aside.

As there has always been such self-contradictory application notes, it may be that previous procedure will apply - but will we know for sure until HMRC provides the relevant SA template we can experiment with?

 

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By Caber Feidh
13th Mar 2015 23:44

Does a director need to file a SA return for a dormant company?

Psyche is confident that company directors all have to file self assessment returns and Paul D Utherone cited a link to a FTT decision that supported Psyche.

But does the director need to file a return if the company is dormant, and always has been?

The answer will not affect me directly. I do have a dormant company but I also need to file an online SA return in response to HMRC’s yearly request (and always before the deadline).

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Replying to jcace:
By Paul D Utherone
14th Mar 2015 09:18

No no no (and we're getting away from the OP here)

Caber Feidh wrote:

Psyche is confident that company directors all have to file self assessment returns and Paul D Utherone cited a link to a FTT decision that supported Psyche.

But does the director need to file a return if the company is dormant, and always has been?

The answer will not affect me directly. I do have a dormant company but I also need to file an online SA return in response to HMRC’s yearly request (and always before the deadline).

... Psyche is suspected of playing the wind up card, and I quoted a link to an FTT case that will set no precedent, but which restates the view set out on HMRC's website that 'all directors have to submit a tax return', a view not backed up by the legislation.

If HMRC require you to make a return each year then you have to do so. If the only reason that they do is that they have you marked down as a director, but otherwise you have no additional tax liability, and if your only directorship is of a dormant company then you might ask HMRC to take you out of SA and not require returns in the future. If they will not do so and continue to issue returns then there is not a lot you can do. HMRC can require anyone to make a return and if they do then the return must be submitted within the time limits set by legislation

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By Caber Feidh
13th Mar 2015 23:54

The Courts still provide 8% interest

If you succeed in a civil dispute the Court can award interest pursuant to the County Courts Act 1984 at the rate of 8% per annum on your damages and legal costs during the period from the date of the Court Order awarding them (the incipitur rule) to the date when they are paid to you.

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By petersaxton
14th Mar 2015 10:48

Current HMRC attitude

HMRC seem to want to take people out of self assessment.

I had a self-employed person who only had a small pension and small interest to add to his partnership income but he got a letter saying that he didn't have to complete a tax return in future.

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Replying to Wilson Philips:
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By [email protected]
02nd Apr 2015 12:01

Sorry, accruing interest, Peter?

 

Can you ACCRUE interest earnings proportionately over tax years if you earn interest on an annual basis.

Can you use discretion as to whether you apply accruals or earned basis?

Presumably not?   Because you would suffer penalties if savings withdrawn before date of interest receipt?

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Replying to kathyray:
By petersaxton
02nd Apr 2015 12:13

I'll try again

<a href="mailto:[email protected]">[email protected]</a> wrote:

Can you ACCRUE interest earnings proportionately over tax years if you earn interest on an annual basis.

Can you use discretion as to whether you apply accruals or earned basis?

Presumably not?   Because you would suffer penalties if savings withdrawn before date of interest receipt?

Yes, you ACCRUE interest as it arises not when it is received.

Why do it proportionally? There may be different rates at different times.

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Replying to Wilson Philips:
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By [email protected]
03rd Apr 2015 12:18

Thanks, Peter, - basically it is down to the terms of the saving

 

AS per article :-

A spokesman for HMRC said: "Income tax is charged on interest when it 'arises', which is when it is received or made available to the recipient.

"Interest has been made available if it is credited to an account on which the account holder is free to draw, so higher rate and additional rate taxpayers will have to declare and pay interest due every year.

"For most of them we can just code out any additional tax due and they won't have to fill in a tax return."

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By Tomazaan
14th Mar 2015 12:12

Back to the original question..

If you follow the link given by Psyche, taxable income is defined as including company dividends (as I would expect).  You only get the extra tax free savings income if your taxable income is below the £15,600 limit so £10,000 salary + £5,000 gross interest + £40,000 net dividends will mean that your taxable income is above the limit and you have to pay tax on your interest income. 

Am I missing the point?

 

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Replying to Hazelwood114:
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By robobhoy
14th Mar 2015 13:20

Thank you Tomazaan!

Thank goodness we are back to the original question!

My understanding of the situation was exactly as you describe Tomazaan, then i made the mistake of reading this thread and the old self-doubt started to creep in.

So, are we all agreed? Company dividends ARE included when arriving at the £15,600?

As for those who keep banging on about interest rates and whether all directors need to be in SA, go get your own thread and stop cluttering up this one.

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Replying to Hazelwood114:
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By emanresu
14th Mar 2015 13:47

From HMRC

Tomazaan wrote:

If you follow the link given by Psyche, taxable income is defined as including company dividends (as I would expect).  You only get the extra tax free savings income if your taxable income is below the £15,600 limit so £10,000 salary + £5,000 gross interest + £40,000 net dividends will mean that your taxable income is above the limit and you have to pay tax on your interest income. 

Am I missing the point?

Here's a quote from HMRC in an email directly responding to a previous enquiry I made about the status of Dividend Income in deciding the applicability of Savers Rate:

"An individual's dividend income has no bearing on this computation. It is defined separately character for the purposes of income tax.

An individual's personal allowances are given effect against their income following the ordering rules: the first slice is non-savings income; the second slice is savings income and the top slice is dividend income."

Which directly contradicts your conclusion.  It coud be seen as illogical and as contradicting the meaning of language used, but - as I said previously - it seems to be the current procedure.

This does not mean that there isn't a new procedure in preparation, though !

 

 

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By lme
14th Mar 2015 13:59

Form on the link asks for "any other taxable income"

If you put a high figure in there, it will tell you you won't qualify. i.e. no dividend loophole. Looks clear to me.

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By lme
14th Mar 2015 20:27

Mad, then
Frankly. Thanks, much appreciated.

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By Psyche
15th Mar 2015 16:15

Clear as mud

For the record, I was not trying to wind anyone up.

The guidance does seem to imply that dividends income is included in "taxable income" -- but the current guidance has pretty much the exact same wording, and dividends income is not included when determining whether the starting rate on bank interest applies. 

The new HMRC website format seems to have been devised to be read on tablets and provide no useful information whatsoever. :(

 

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By robobhoy
16th Mar 2015 11:21

Good grief !

Have we got a definitive answer to the original question?

Can Rebecca Bennyworth give us her guidance?

Or perhaps George Osbourne...........he's not busy this week.

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By Caber Feidh
16th Mar 2015 15:52

George Osbourne might not be busy ...

George Osbourne might not be busy this week - but George Osborne certainly will be.

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Replying to accountantccole:
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By robobhoy
16th Mar 2015 16:14

Ha, Ha

Very clever.

Why don't you try answering the question?

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Replying to michaelbeaver:
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By emanresu
16th Mar 2015 16:44

..

robobhoy wrote:

Very clever.

Why don't you try answering the question?

Why don't YOU put the question to HMRC then publish their response here?

(Just like I did last week)

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By The Minion
16th Mar 2015 16:06

That's what i like to see

a good bit of hair splitting, it's what tax is all about:)

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