Errors in tax return software force paper filing

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Glitches in tax return software standards mean that two groups of taxpayers may have to submit their 2016/17 tax returns on paper, instead of electronically, to ensure that they don’t overpay their tax. 

Dividend confusion

The problems stem from the interaction between the separate allowances for savings and dividends, the personal allowance, and the additional rate of tax on income over £150,000. The two groups of taxpayers affected appear to be:

  1. those with total income made up of savings and non-savings income over £32,000 of which the non-savings income is between £11,000 and £16,000
  2. those with non-dividend income of £27,000 to £32,000 plus dividends which take their total income to more than £145,000

Individual taxpayers (not trustees or personal representatives) are entitled to the dividend allowance of £5,000, which taxes the first £5,000 of dividends at 0%, within the tax band the dividends fall into. Dividends are taxed as the highest slice of income. 

Group A

These taxpayers should benefit from the savings rate band of up to £5,000 as their non-savings income not covered by the personal allowance will not use all of the savings rate band. The HMRC tax return software specification fails to give the benefit of the savings rate band in this scenario and hence overcharges taxpayers in this group by up to £1,000.

Example

A taxpayer with non-savings income of £11,000 and savings income of £26,000. The correct amount of tax for 2016/17 is £4,000. Using software based on the HMRC software standards will calculate the tax as £5,000. If you file online the taxpayer will be overcharged by £1,000.

Group B

These taxpayers do not receive any personal savings allowance, as their income makes them additional rate taxpayers. However, they do qualify for the £5,000 dividend tax allowance. The HMRC tax software specification incorrectly deducts the dividend tax allowance that falls in the unused basic rate band from the higher rate band which then pushes dividends up into the additional rate. This error could cost up to £280 if the return is filed electronically instead of by paper.

Software standards

These problems illustrate an underlying issue with the standards set for tax software by HMRC.

All tax software developers are required to produce tax return software which abides by computational standards set by HMRC. If the software doesn’t follow those computational rules, the tax return will be rejected by the HMRC’s electronic gateway. This is a sensible control mechanism.

Software developers have confirmed that the 2016/17 tax return software has to have identical calculations to those performed by the HMRC system, or it cannot be approved by HMRC. Any software house using the HMRC computations should be able to successfully file a return in the excluded scenarios, but the tax due will be overstated. Any software house not using the HMRC computations would suffer mass rejections of returns.

Work around

HMRC has added the scenarios for taxpayers in groups A and B to their exclusions list which was issued on 17 March. The official instruction is to file the returns for taxpayers who fall these groups using a paper return rather than by online filing. This means the affected taxpayers will remain on the ‘paper filing’ list until filing for 2016/17 tax returns is completed.

Tim Good and Giles Mooney, two of the directors of Absolute Software, have been working with HMRC and speaking to the Treasury about this year’s complexity following HMRC’s decision to use Good’s spreadsheet calculator algorithms as the basis for their calculation software this year. It appears that HMRC’s specification for its own tax calculation software includes two errors, which are not present in the spreadsheet.

Tim Good explained: “I had a meeting with HMRC last November to clarify the computational issues and it looked as though they were going to be able to get it sorted in time for the new reporting season. But apparently, the team responsible for coding the main HMRC self assessment system was simply unable to complete the task from the Excel algorithms in time.

I have every sympathy for the HMRC team – the villain of the piece is the horrendous complexity that the interaction between the allowances gives rise to in certain (not that unusual) combinations of income.

We thought we were there just in time for the 2017 software release in early April but because of the coding problems they have encountered, HMRC has decided to go ahead with the instruction that all returns for the scenarios on the exclusions list should be filed on paper.”

Not software supplier’s fault

Whenever HMRC’s software standards are not in line with tax law, tax returns with incorrect tax computations are successfully submitted while correct returns may be rejected. These errors are only spotted when the same tax calculation is performed independently say on paper, or in this case, on a stand-alone spreadsheet. 

The solution is to have an independent body check the tax software standards set by HMRC, to ensure they are correct and in line with tax law. HMRC should not be permitted to check its own homework, as it does now.

This is not the first error to arise from incorrect tax software standards and it won’t be the last.

Don’t blame your software supplier – it really isn’t their fault.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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to SXGuy
15th Jun 2017 16:45

An online SA tax return can not replace a paper version already filed.

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By Ammie
29th Mar 2017 11:59

Simple solution. A late filing penalty amnesty. No late filing penalties to be imposed on return rejections resulting from the glitch until such time as it is corrected.
I know, it doesn't work that way!!
There will be large batches of generic appeals.

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29th Mar 2017 12:01

Anyone thought of taking this to the Daily Mail? They do like to get stuck into this sort of thing and I think all the possible (probable) MTD issues and problems are sailing under the radar. Maybe with them on board someone might sit up and take notice of the debacle unfolding.

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By Tornado
29th Mar 2017 12:09

I have had a great idea.

Clearly there is going to be a massive increase in Appeals and Compensation Claims against HMRC when MTD gets going. I think there is a clear opportunity for setting up a claims business - perhaps "TaxClaims4u"

With the promotional hook "Have you been shafted by HMRC, then contact us and we will get you loads of dosh back", it has to be a winner.

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By RPTAS
29th Mar 2017 12:12

Don't you just love 'em. Whilst 'tax simplification' moves at a snail's pace tax complication moves like Inter city 225.
99% of the population have no idea about the tax they pay but that's just how HMRC likes it.
On one hand we have MTD which forces everyone to use computers and now we have advice that we must use paper returns for some taxpayers.
It's a joke.

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29th Mar 2017 12:25

If ever there was a clear example of the need for tax system simplification, this has to be it. When the tax administration cannot cope with specifying correctly how the system is supposed to work you have pretty much reached peak practical complexity. Which is not to say that further complexity isn't possible, just that beyond this point there's no hope of dealin with it properly.

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By trecar
29th Mar 2017 12:35

Two things. Has this failure to correctly design the algorithm been notified to the appropriate parliamentary scrutiny committee and the government auditor. I am sure they would both have something to say about the arrogance of a department that insists on levying penalties for innocent errors and yet cannot carry out it's own responsibilities correctly.

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to trecar
30th Mar 2017 00:27

"something to say about the arrogance of a department that insists on levying penalties for innocent errors and yet cannot carry out it's own responsibilities correctly."

Yes they certainly will - most probably along the lines of
"keep it up - the more we can screw out of the mobility of Morlocks the better we Eloi will live"

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29th Mar 2017 13:13

I put the Example of Group A into our Iris Software and it correctly worked out the tax.
If I then trnasmit that electronically, does it:
a) Get processed correctly
b) Get rejected
c) Get amended to HMRC's wrong calculation

Is it only when actually keying the figures into HMRC's software does the error arise?

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to ozzie1952
29th Mar 2017 15:25

As I understand the situation your software will be correct until 6 April, when it will have to revert to the HMRC approved software results. Try it again next week?

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to ozzie1952
29th Mar 2017 15:25

As I understand the situation your software will be correct until 6 April, when it will have to revert to the HMRC approved software results. Try it again next week?

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29th Mar 2017 13:14

I put the Example of Group A into our Iris Software and it correctly worked out the tax.
If I then trnasmit that electronically, does it:
a) Get processed correctly
b) Get rejected
c) Get amended to HMRC's wrong calculation

Is it only when actually keying the figures into HMRC's software does the error arise?

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to ozzie1952
29th Mar 2017 13:30

I think the point is that your software will get it right but when you try to submit it to HMRC it won't file because the correct calculation from your software will disagree with the incorrect calculation at HMRC's end. So you'll have no alternative but to file on paper.

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29th Mar 2017 14:57

Is HMRC planning to run a webinar for this? Now that would be entertainment!

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29th Mar 2017 15:58

Someone is to blame. Who is it?

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By housego
29th Mar 2017 16:17

Will HMRC issue some postage paid envelopes ???

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By housego
29th Mar 2017 16:18

Will HMRC be issuing some postage paid envelopes ???

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29th Mar 2017 16:19

It might be possible to forgive HMRC for getting it wrong on a complicated matter like this but what about the simple issues that I've experienced over the past 12 months. Such as dozens of incorrect tax calculations received from HMRC removing class 2 NICs even though they are due or not being able to process the ridiculously stupid transfer of marriage allowance even though it's claimed on the Tax Return unless you also phone them to make a verbal claim as well. How can anyone have any confidence whatsoever in HMRC delivering the software to cope with their Muddled Tax Direction.

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29th Mar 2017 16:32

We've been using Tim Good's excellent tax calculator for our 2016/17 tax planning but assumed that this would be fixed by the time returns were to be submitted.

I don't understand how a paper return is considered an acceptable get-a-round, firstly, how many accountants actually prepare returns without their software in this time and age, I resent doing this but it is possible if needed.

Secondly though, surely when I submit the paper return HMRC will log the return into their (incorrectly programmed) system and issue a £1,000 underpayment notice and tell me that I've calculated the return incorrectly?

Are HMRC planning on issuing the correct guidance later in the year?

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29th Mar 2017 19:00

So can we not file a correct return online, have it rejected and then raise an error penalty on hmrc for failing to take reasonable care

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to Smokoe Joe
30th Mar 2017 03:11

Smokoe Joe wrote:

So can we not file a correct return online, have it rejected and then raise an error penalty on hmrc for failing to take reasonable care


When HMRC change a self assessment under s9ZB they are doing so as quasi agent for the taxpayer, who theoretically at least has a duty to check it on pain of potential penalties, yes, but penalties on the taxpayer. Here of course the error would overstate the liability and any tax based penalty would be nil.

With kind regards

Clint Westwood

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By LAC47
29th Mar 2017 23:54

Nah...it's not April fools day until Saturday.

Rebecca are you just trying to wind us up!!!!

You really could not make this up....

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30th Mar 2017 03:28

I don't really get all the brouhaha.

If I file a paper return it is going to contain exactly the same income split exactly the same way between sources as had I filed electronically.

I am under no obligation to say why I am filing by paper at least when filing before the paper deadline, and all I would expect from hmrc is that some monkey would retype the figures on their system with no reason to depart from their own ahem faultless tax liability calculator.

Hmrc has never paid any attention to the tax liability figure entered by the taxpayer on the return so why change now?

I see no cause to reject an online filing. The whole thing could be resolved through the s.9ZB procedure which has a built in statutory mechanism for subsequent recorrection.

We weren't forced to paper file all the returns caught up in the 2NIC fiasco and irritating though that fiasco was I would not have wanted to paper file them as a solution.

With kind regards

Clint Westwood

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By Ammie
30th Mar 2017 09:14

As I was told many many years ago

"HMRC and government want total control but take no responsibility", why?

Because as a senior HMRC officer once told me "because we can and statute empowers us to". The same officer scoffed when I used the terms "fair" and "level playing field", "What does that mean?, we don't have to be fair we can do, pretty much, what we want"

I promise you I am not making it up!!

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30th Mar 2017 09:48

Is this an early April fools?

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30th Mar 2017 10:52

HMRC are always quick to point out it is self assessment which they say means process now and check later. why should the taxpayer have to compromise with a paper return. If they know the correct amount of tax due, they should file online, pay what they have calculated is due and let HMRC sort out the difference. They can even put an explanation in the white box. If HMRC chase for the balance, just send them a copy of the return and both sets of calculations. if they persist, repeat the process. If they still persist, send copies to the management team listed on the HMRC home page of gov.uk (I believe in starting at the top and working down when things get to that stage). They will get it right eventually.

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30th Mar 2017 10:56

Reading the furore created by MTD and this follows...
I suggest each of us writes to their MP and copy in some of the more pithy comments from those above. If the Treasury get enough queries from MP's all predisposed not to accept an easy brush off, maybe something might just happen?
Anyone who has an MP on the Treasury Select committee is especially requested to send in the relevant details of this ongoing fiasco.

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30th Mar 2017 11:04

Since no-one will have the integrity to resign over this and MTD will be a fait-accompli, the time for Direct Action might be coming. I have predicted this for a number of years.

You'd have thought Brexit would have learned 'em, but you cannot teach a pig...

Approaching the Daily Wail (if they're not already in the pockets of the Overlords) might be a good first step to avoid an all-out taxpayer rebellion/strike. After all, the Corn Laws went well, didn't they? They probably did after the Fake History re-write...

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30th Mar 2017 11:11

Added to which - yes paper returns can be submitted by 31 October (assuming we manage to identify all affected clients!) but they will not be processed by HMRC for months. One submitted in October 2016 has only just been processed - 5 months later! What will happen to accurancy of the 31.1.18 demand notes??? My mind is boggling at the thought of all the potential extra time in many areas, not least of which could be reassuring clients. oh my!

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30th Mar 2017 11:30

And to add insult to injury the HMRC site is currently 'experiencing technical difficulties'. If they can't get their own tax rules right on their software, how are the going to cope with MTD, as everyone is saying. Technical difficulties will, I fear, be a regular problem as they struggle to cope.

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30th Mar 2017 11:42

Personally I'm horrified by this, as a large proportion of my clients will fall into this, and it's only through dealing with it all automatically & over the internet & via emails that my firm copes with last 3 months rush.

The thought of preparing a tax return using digita & then manually changing the tax calculation to give the right answer, printing the whole lot out & posting to the clients for signature waiting to get it back & then posting it to HMRC, and then waiting for ever for them to process it because they won't have enough staff (Never mind the high possibility of it all being lost in the post as happened to me one year!), just fills me full of dread.

Surely its not beyond their capabilities to correct the thing & get it sorted in the next few weeks, to avoid all this [***]!!!!!!!!

MTD - ho ho ho

Any one know where I can find the email address of the following:-
1)MP's
2)Secretary of State for the Treasury
3) Prime minister.
4) Daily Mail
5) Top 5 names in HMRC

As I want to let them know exactly how I feel about this
(Assuming its not an early April fools joke)

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30th Mar 2017 13:05

The commercial software could be programmed to highlight the affected cases and flag up a warning that the return should be filed manually (and produce a report showing the correct calculation)

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to acca_Laurence
30th Mar 2017 13:13

A lot of people seem to have mis-read how this will work. Your software will calculate the tax correctly. When you try and file it online it will be rejected because your correct calculation won't agree with HMRC's incorrect calculation. It is at that stage that you will know that it has to be printed off your software and filed manually.

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to monksview
04th Apr 2017 16:11

monksview wrote:

A lot of people seem to have mis-read how this will work. Your software will calculate the tax correctly. When you try and file it online it will be rejected because your correct calculation won't agree with HMRC's incorrect calculation. It is at that stage that you will know that it has to be printed off your software and filed manually.

I don't think that this is correct.

I have just been on the blower to Sage to get some reassurance about practically at what point in the process for an individual return we would get to know that it is one of the "offenders". I don't want to be uploading tax returns to our portal for electronic signature on 20th January only to become aware of its rejection when actually trying to file online.

They did not have an answer to my particular concern just now, because they, and other software houses, are furiously paddling beneath the surface trying to get a solution together and haven't yet got there. Still a case of watch this space.

BUT, on one point they were insistent: In order to get their software "certified" by HMRC it has to calculate the same liability as HMRC software, regardless of whether that calculation is legally compliant. So you will NOT get a situation where the third party vendor is producing correct comps at odds with HMRC. We all sink and swim together in the same sewer.

Another worrying point that was made to me is that the couple of examples so far admitted to by HMRC at the head of this thread are "a drop in the ocean" as reported to me by the rep. But I have not been given other examples to back this up.

I am sure it is going to be fun when our clients start applying for mortgages next year and want a third party SA302 backed by a matching tax year overview.

With kind regards

Clint Westwood

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By Tornado
30th Mar 2017 13:23

There has been a lot of interesting posts on this topic but none of it would have been necessary if HMRC had carried out their work competently.

"But apparently, the team responsible for coding the main HMRC self assessment system was simply unable to complete the task from the Excel algorithms in time."

What sort of nonsense is this?

I have no sympathy for HMRC at all. It is quite clearly their responsibility to ensure that their software works correctly and if it does not, then they have to take appropriate steps to ensure that it does.

End of story.

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By kdbr
30th Mar 2017 16:18

Everyone got their email from Tim Good?

"No tax return software can calculate the correct tax for these clients"

"potentially a significant number of taxpayers"

"Our tax return software (and maybe yours?) will be able to alert you to the cases where you will have to file a paper return - but compliance software cannot perform the correct calculations"

So the year ahead is shaping up to be fun isn't it? Advising clients of the correct liabilities, if you can, then arguing with HMRC how you get there. Still waiting to hear from my software suppliers.

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By Tornado
to kdbr
31st Mar 2017 14:22

I am still trying to get my head around a situation where, despite having millions of £'s at their disposal, HMRC are unable to program their tax software correctly and even when help is offered and given by a separate commercial developer, they still cannot get it right.

I find it unbelievable.

Am I missing something here?

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31st Mar 2017 11:37

lol that is the problem when simple people try to simplify complex matters that were quite simple if only they had had some brains.

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01st Apr 2017 12:14

Mind you,,,, once every year we all have to file a paper return or two.

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By JLPrice
05th Apr 2017 16:34

I know it's been a few days now since the last comment, but I have today had an e-mail from Digita stating that their tax software WILL calculate the correct tax payable, but this cannot be submitted electronically as it will fail HMRCs checks.

In this case the return will need to be printed from the software and posted to the client for signature and then posted onto HMRC. No amendments will need to be made to the tax return as it will be correct. If only HMRC would accept digital signatures as Companies House do, then the process would be a lot simpler!

I am not sure how other software providers will work, but I would hope the larger ones (I'm thinking Sage and Iris) should have a similar set-up!

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14th Apr 2017 13:04

PTP released their 2017 software on 06/04/17. They also released a calculator to identify the cases HMRC will calculate incorrectly. At 13:34 on 07/04/17 an error in the calculator was reported to PTP. By 15:09 PTP had fixed the error and released a new version of the calculator. It had taken a mere 95 minutes from first reporting to release of the fixed software. Very impressive. So why won't HMRC be able to fix their software at all? I would have thought they would be legally obliged to calculate the correct tax. At the moment HMRC will reject returns that calculate the correct tax. It’s embarrassing that our national taxing authority is so incompetent.

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15th Apr 2017 14:04

But DOES the PTP Softare work now? Removing a bug in 95m may or may not be to their credit. What confidence can we place in any suppliers' systems?

Just as a mental exercise, I've looked at this issue of optimising the processing of the Savings Rate. It is horrifyingly more complicated than the rest of the assessment process, or, at least, to construct some specification better than the brute force "try out all permuations of the personal allowance and see which results in the least tax" method.

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to emanresu
18th Apr 2017 13:07

There's a more fundamental issue here – UK tax is TOO complex. And it’s getting a whole lot more complex with different bands in Scotland.

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11th May 2017 09:04

Making Tax Digital - let's go back to filing paper returns .... progress indeed!

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By DRMJOB
19th May 2017 10:35

When recently completing my 2017 return I recalled this topic and checked carefully the HMRC tax calculation against my own spreadsheet figure. The overcharge was £1375 . This was because £5500 had been charged at 32.5% rather than the correct 7.5%. The £5500 being made up og the savings allowance £500 and the £5000 dividend exemption. As there was no other option I am now making a paper return.

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to DRMJOB
19th May 2017 10:55

Were you using HMRC's own software?

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By DRMJOB
to monksview
21st May 2017 11:14

Yes I was. Am now awaiting response to posted return. The letter sent detailed the problem with figures so hopefully will be read!

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to DRMJOB
19th May 2017 19:31

That's a bit concerning. I thought that the key problem left in the HMRC software related to the SRA. Can you post/PM some figures?

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to DRMJOB
20th May 2017 10:22

HMRC are the national taxing authority in the UK and are morally (and I would have thought legally) obliged to calculate tax correctly. It is disgraceful that they are not called to account. Image how HMRC would react if a business did not calculate its VAT correctly! HMRC claim they are using "agile technology" to be able to correct MTD errors quickly. HMRC won't be fixing this problem until next year ie after MTD is compulsory. So much for "agile technology". I've met my MP to complain about HMRC and MTD. He was unaware of all the issues and said our meeting was a real eye opening. I thought I was getting somewhere but then came the general election and of course Brexit overshadows everything.

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By MikeF
07th Aug 2017 10:54

There is a problem with the CGT section. I've sold some shares in a private company & qualify for Entrepreneurs Relief. The box to claim the relief does not include ER. I've sent screenshots to the helpline but it's unresolved & I've sent a paper return instead.

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