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Empty wallet | accountingweb | HMRC penalise the poor by requiring tax return with no tax due
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HMRC penalises the poor with fines when no tax due

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Around 40% of income tax self assessment late-filing penalties are paid by people with no income tax liability. Rebecca Cave wonders why HMRC penalises the poor and ignorant.

1st Sep 2023
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Many people with little or no income believe they don’t have to complete a tax return because they will have no tax to pay, and therefore there is no need to report anything to HMRC. 

This is generally true, but if the individual has been drawn into the income tax self assessment (ITSA) system for any reason they are required to submit a tax return, until they can somehow be extracted from that system. This is not always easy to do as it often requires a conversation with a human on one of the HMRC helplines.

Out for the summer

The HMRC self assessment helpline has been closed for the summer and is due to reopen on 4 September 2023. The decision to close the HMRC helpline for three months was criticised by charities who help those on low incomes. The fear is that people who can’t afford professional advice may instead pick up inaccurate information through online forums and chat groups. 

Fined for doing nothing 

The concept of getting fined for doing nothing is difficult for many people to grasp, but that is exactly what the late filing penalty system does.

When income tax self assessment (ITSA) was introduced the penalties for filing a tax return late were tied to the amount of tax owing. Taxpayers who were due a tax refund could be relaxed about when they submitted their tax return as there was no pressure to file by the relevant deadline.

This changed from 2010/11 when the structure of late-filing penalties was altered for nearly all direct taxes by FA 2009, Sch 55. 

The late-filing penalties are now only linked to the amount of tax owing when the tax return is more than six months late. Even then the tax-geared penalty is a minimum of £300, which is imposed on top of penalties of £1,000 which may have already been charged (see table). A taxpayer who is over a year late with their tax return can easily rack up penalties of £1,600, when they owe no tax at all. 

Period of lateness Penalty
Up to 3 months  £100
More than 3 months  £10 per day to maximum of £900
More than 6 months  Greater of 5% of tax liability and £300 
More than 12 months  Greater of 5% of tax liability and £300 

Tax on ignorance 

Research by Tax Policy Associates found that HMRC charged 420,000 late-filing penalties for the tax years 2018/19 to 2021/22 to people with total incomes below the personal allowance threshold. This amounted to 40% of all self assessment late-filing penalties issued for those years. 

Many taxpayers will have received multiple late-filing penalties as they don’t understand the penalty appeal mechanism, or how they can extract themselves from the self assessment system.

The June 2023 investigation by Tax Policy Associates was an update on their earlier research in March 2023, which resulted in many people getting in contact with their stories of missing the self assessment filing deadline, resulting in unmanageable penalties. For those on low incomes, even a £100 penalty can be very difficult to pay. 

How penalties should change 

HMRC responded to the Tax Policy Associates reports citing the proposed changes in the structure of late-filing penalties, which it said would come in from April 2025. The new penalty system imposes points for the first few late submissions and then a £200 flat-rate penalty when a certain threshold of points is reached. 

However, we know this new penalty system will be tied to the introduction of Making Tax Digital for income tax self assessment (MTD ITSA), which has now been pushed back to at least 6 April 2026. Caroline Miskin of the Institute of Chartered Accountants in England and Wales’s Tax Faculty noted, “Given the delays to MTD ITSA we won’t see penalty reform in 2025. Implementation is dependent on HMRC moving records from the self assessment system (CESA) to its enterprise tax management platform (ETMP) so the current system is probably with us for a while yet.”

In the meantime 

Dan Neidle of Tax Policy Associates has the following suggestions that HMRC could implement now to help low-income individuals who are landed with late-filing penalties.

  • Cancel the penalties if HMRC determines the taxpayer has no taxable income.
  • Analyse the population of low-income individuals who are within self assessment and actively remove them from the self assessment system. 
  • Monitor the imposition of late-filing penalties to provide a full picture of which taxpayers are penalised, by income category, and report annually with an aim to reduce the numbers of low-income taxpayers who are penalised.

Replies (32)

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By Hugo Fair
01st Sep 2023 13:26

Rebecca, you "wonder why HMRC penalises the poor and ignorant?"

It's not just because it's easy pickings ... more that, unlike the benighted taxpayer, HMRC don't get penalised for 'doing nothing'.

In short and as usual, there is absolutely no incentive for them (individually or as a body) to change any of this ... indeed in their topsy-turvy world a reduction in that 'income' stream runs the risk of being seen as evidence that they are failing!

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By Hugo Fair
01st Sep 2023 13:43

BTW how does DN propose (in practical terms) that HMRC operate his suggestion to:
"Analyse the population of low-income individuals who are within self assessment and actively remove them from the self assessment system"?

Leaving aside the loose (lack of) definition of "low-income", how are HMRC supposed to know the total from all sources in the absence of a SATR (given that their current ability to reliable collate this *for* SATR is woeful)?
To paraphrase those financial services types: 'the past is no guide or guarantee to current or future performance'!

As SP passes the tax threshold (and even meagre savings currently generate interest/dividends above their thresholds), you can't be 'certain in a sort of broad-brush way' - you need actual figures.
And as people (particularly the poorest) come to rely on a plethora of part-time/intermittent jobs, their focus is more on survival than on maintaining running totals for the tax year.

I'm no econometrician, but the only way to safely take this swathe of the population out of the tax system (with any degree of certainty) would be to simplify the system itself ... by removing many of the allowances and threshold types, and having a single threshold (irrespective of the source of the income) of somewhere around £20k pa.

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Replying to Hugo Fair:
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By johnjenkins
04th Sep 2023 10:20

"simplifying the tax system". MTD springs to mind.

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By ireallyshouldknowthisbut
01st Sep 2023 14:09

Its a tricky one.

Remove penalties where there is no liability (ie how it used to be), and we are back to HMRC not knowing if unfiled return have no liability (so the tax payer cant be bothered, or will do 4 or 5 years in on go as I have seen) or unfiled as its a massive liability and don't want to pay it.

On the other hand, fining people with no liability is bang out of order. They have got better at withdrawing returns, which you can now do after the filing deadline, but perhaps if the tax payer having FILED the return does not meet the criteria for self assessment penalties should be reduced to no more than the tax liability.

The poorest are of course lease able to afford the likes us us lot to help them. Our minimum fee is £250+VAT or its just not worth the time taking somone on. That's a lot of money to someone with income below £12k.

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By GHarr497688
01st Sep 2023 17:07

It's a great shame a system isn't put in place for HMRC to be penalised when they don't answer a letter of a phone call. I think it's time our MP's and Associated bodies stepped up and called HMRC out for their high and mighty attitude. As far as I can tell they do just as they feel like with no remorse or feeling for human beings. I recall be told that "compensation" could not be paid to a limited company as a company can't have feelings !!

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Replying to GHarr497688:
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By Kaylee100
04th Sep 2023 09:45

To be fair, this nuance is evidenced by personal bankruptcy versus liquidation

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Replying to GHarr497688:
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By morganedge
05th Sep 2023 08:36

I suspect that those MP's with any power to affect HMRC are perfectly happy with the current situation. It suits their agenda of shrinking the state, proving the public sector is less effective and it's one of the few Government bodies that brings in cash. Why would they meddle with that?

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By Mr J Andrews
04th Sep 2023 09:56

It doesn't help that the one page 'Notice To File' doesn't appear as threatening as the hitherto full blown paper Return for the non IT literate - mostly the poor and ignorant alluded to by Rebecca. How many times have I heard that it was put ....in the drawer .....behind the mantlepiece clock....etc ....and overlooked.
The HMRC website doesn't help either. I've also heard so many HMRC ''Customers'' misled by the Revenue advice ''....Who must send a Tax Return.....''. Following the criteria and finding that they are not in the chosen category , they feel reasonably safe that filing is not required.
What the HMRC advice omits is the fact that if it's been served , it must be delivered !

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By tanyajackson
04th Sep 2023 09:59

I've had the smallest clients with no tax to pay being issued a tax return and more anoyingly, those with massive incomes, who have failed to file tax returns but should, have their tax returns cancelled for no reason other than that HMRC have obviously given up chasing them.
The system is broke broke broke.

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7om
By Tom 7000
04th Sep 2023 10:03

£100. Now pays for a curry for 3 people.

But I guess if your income is below 12.5k, the struggle is real

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By SimonP
04th Sep 2023 10:12

A client's 2021 tax return was filed on time and he paid the ensuing tax liability on time. Due to HMRC incompetence, his return was not processed properly or at all resulting in his £5,000 liability being somehow calculated as £NIL; and 8 months later HMRC arbitrarily refunded his "overpaid tax".

Two weeks later they sent him a correct SA302 along with Penalty Notices for not having paid his tax on time. You couldn't make it up. I instructed my client to pay the Penalty Notices and the interest charges so as to avoid any additional complications.

Eventually, after much correspondence, they very graciously agreed to cancel the Penalty Notices and repaid my client, with not so much as an apology.

But, hold on, what about all the interest that he paid in respect of those ficticious Penalty Notices? None of my letters requesting repayment (and supplement?) has been acknowledged and my client is out of pocket. Will he be one of those "HMRC customers" for whom I might receive a reply in 3 years' time?

My client will definitely be demanding compensation in respect of my fees as soon as this sorry saga is wound up.

And they have the cheek to tell customers to reply to their correspondence (see SA302's page 2) within 30 days.

Their behaviour is nothing short of an absolute disgrace.

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By Ammie
04th Sep 2023 10:15

HMRC cannot convince me, however red in the face they get, that penalties are not, at least in part, a revenue raising exercise.

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By Homeworker
04th Sep 2023 10:19

I'm currently fighting with HMRC to get multiple penalties for late 2020/21 returns cancelled. The clients live in the channel islands but have UK property. Not declared as profit was very small and so no tax due. They finally registered for SA last year when the Jersey authorities asked for evidence that the income was being declared over here. We have filed returns for 2021/2022 onwards but dealt with the earlier years by letter and a schedule, showing the income and expenses. Clients say they did not receive notice to file for 2020/21 or we would have dealt with that year too.
We are still waiting for a reply to that letter 7 months later!

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By Retrocanary
04th Sep 2023 10:42

For me it's the paragraph "Research by Tax Policy Associates found that HMRC charged 420,000 late-filing penalties for the tax years 2018/19 to 2021/22 to people with total incomes below the personal allowance threshold. This amounted to 40% of all self assessment late-filing penalties issued for those years. "- how can this be justified? Surely this is a symptom of something being very wrong with HMRC's communications with the public, and of their systems being too complicated for the average punter?

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By Springfield
04th Sep 2023 11:14

OK - radical idea, but it needs something radical.

Run a pilot scheme for HMRC that mimics a modern accountancy practice. Take a group of HMRC employees plus a few specialists on VAT, CGT etc. Set up an office in a modern vacant commercial premises. Give them responsibility initially for a few thousand tax-payers. Make sure the staff have proper access to all the HMRC internal systems. Give all those tax payers a direct phone number to call for queries which will be answered immediately or, if they state the type of tax, they will gt a call back that day.

Minimum standards to include - all phone calls answered or called straight back, all letters replied to same day. More complex cases, the tax payer can arrange a personal visit, (with advisor if neccessary). Occasional meetings with groups of agents to help with improvements.

Head of unit to demonstrate at the end of twelve months that with the right people, training, resources and authority, that tax collected is up, tax-payer satisfaction is much improved, job satisfaction is high and career progression along a clear path is visible.

Then roll out gradually across the country.

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Replying to Springfield:
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By Hugo Fair
04th Sep 2023 11:55

It's all so logically obvious and seems very well thought out ... indeed it's almost as though you'd had direct experience of such a system! :=)

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Replying to Springfield:
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By Jack the Lad
04th Sep 2023 12:05

Springfield, this is what they did before 1997! As an "old fart accountant", I remember them as the good old days -- local tax offices, with knowledgeable Inspectors, who knew most of the accountants (and had their "black list"!), and who you could phone to sort out any queries and deal with them there and then.

By all means penalise those who are offenders, particularly the serial offenders, but penalising low income non-tax-paying people is beyond the pale and totally unreasonable. They are easy meat, and it is especially unfair when large organisations are getting away with millions on technicalities.

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Replying to Jack the Lad:
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By Sue Murby
04th Sep 2023 13:19

Being another "old fart" I remember those days too. Given the last minute rush with returns at the end of January I used to put to one side those clients that I knew would have a loss. As they invariably had another source of income, on PAYE, there would likely be a tax refund so the tax returns would be completed in February and sent off. No penalty for late payment.

In the dim and distant past which many on here will not have experienced, estimated assessments would raised. Often these would be ignored if the actual profit exceeded the estimate. HMRC, being quite sensible , would raise a much higher estimated assessment the following year resulting in submission of tax returns etc.

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Replying to Jack the Lad:
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By morganedge
05th Sep 2023 08:43

I love "good old days" stories. I seem to recall that when HMRC was created, the overinflated grade structure of the Inland Revenue meant that the new behemoth was greatly influenced by ex-Inland Revenue management. I believe the Mapeley scheme, where the entire estate was sold off to a tax haven and leased back for the next 20 years was also masterminded by an Inland Revenue supremo.

Getting back to the main issue, I agree HMRC staff need to be empowered to deal with and cancel these low income penalties. But that would probably mean hiring more staff to empower. Don't worry, someone is working on a digital solution.

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By trecar
04th Sep 2023 11:16

This topic says so much about what is currently wrong with not just HMRC but also the Treasury and government policies.
Would it be too much to suggest that the Treasury revert to the previous policy of deducting tax at source on interest payments. If nothing else it would ensure that no basic rate tax is lost to the Treasury. Refunds of overpaid tax can be dealt with by a simple submission showing total income and allowances as used to happen. A previous policy where penalties were limited to the tax lost could also be re-introduced.
The solutions seem quite simple and all used to exist so it cannot be argued that they cannot be introduced by our new super efficient and customer facing tax authorities.
But then again who am I but some sad ancient accountant longing for the times when we actually had a Revenue authority that worked and responded to those who were required to interact with it.

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By JackH
04th Sep 2023 12:31

I am not sure that HMRC are not attempting to solve this issue but as ever they are incompetent in doing so.

If you file a tax return, in my case for 2 consecutive years, showing that your taxable income is less than the PA, you get The Silly Letter. It says you no longer need to file. The online SA system, if you answer truthfully, will not then let you file online but its inbuilt thresholds are extremely high, way over the PA if you have some types of disregarded income. I spent 40 minutes phoning to make a claim of the type which must only be made in a return and was told it could be processed during the call, no return being necessary. Excuse me?

On October 3 the same calendar year I got a Simple Assessment for £1800 charging my State Retirement Pension but giving me no PA. I spent an hour waiting on the phone before I could query this. You must do that or there is no appeal! TMA ss 28H and 31AA. I pointed out as well that this assessment must have been made before October 5 (s7 deadline) and October 31 paper return deadline, when HMRC had no accurate idea of my taxable income. And that my income as a British citizen would have to exceed £125k for me to have no personal allowance and that this fandango had wasted my time and theirs.

I then filed on paper. The following January I got The Silly Letter again, plus no Notice to File, so I'm waiting to see what happens next and whether my treatment will accord with my "legitimate expectations". I found that starting with 2023 you cannot now download a return form but must phone up. I discovered one on assets.publishing service.gov.uk, via my tax agent Google.

So their attempt to cut down their personnel time and cost has backfired because of their inveterate bungling. Which they compensate for by their safety net of penalties and interest. BTW I have had several much begrudged victories on interest. DMBM405000. If you do not file (see s12D) you will not get the essential finality provided by s29 (touted as the quid pro quo for Self-Assessment) and are open to a discovery assessment for 4 years. This is a JR case somewhere waiting to occur. All US taxpayers must file a 1040K unless their gross income is below the specified amount for their status. Simples!

This lunacy is going to be compounded as fiscal drag brings more people into tax (despite PAYE) coupled with reductions in the dividend allowance and the CGT annual exemption and the rise in rates of interest for savers (mine will now be over the limit). Deduction of tax at source and the tax-free allowance was abolished to avoid multiple repayments by HMRC, another own goal. All of this is partial MTD by stealth and wait until the real monster surfaces from the Long Grass, if ever. HMRC are unfazed by the TRS farce which must affect a smaller number.

Taxpayer confidentiality is not just a shield for HMRC but a sword. Agents can rarely obtain authority from clients to publish highly fact-specific details of their clients' tax affairs. The generalised gripes of professional bodies are met with the Putinesque snide request to cite actual cases. HMRC shamelessly use publicity to deter taxpayers from going to the FTT plus the implied threat to appeal if they lose. This is punk litigation without the sanctions that impact most pragmatic commercial litigants.

I have provided my own limited details here as a modest pot shot at this arrogant complacent inept mob. We must count ourselves fortunate that they have no plans (as far as we know) to invade a sovereign state.

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Replying to JackH:
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By JackH
04th Sep 2023 15:06

In today's post there arrived two separate letters advising a UTR for each of two trusts previously as registered as non-taxable. Notification of taxability was given 7 days ago. Some of my letters to HMRC, critical of some of their policies and pearls of wisdom, have not been answered for over 6 months. Many of you tax agents will be familiar with their rather different turnaround time on essential queries. There's none so deaf....! Or cynical.

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Replying to JackH:
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By Rgab1947
05th Sep 2023 09:55

"We must count ourselves fortunate that they have no plans (as far as we know) to invade a sovereign state."

They would c$ck it up.

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Replying to JackH:
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By Jack the Lad
05th Sep 2023 11:22

JackH, HMRC have already invaded a sovereign state -- ours! And they are in as much mess as is Russia in Ukraine!
Jim Harra already has a CB, and it is only a matter of time before he gets an OBE at the very least, if not a knighthood like his predecessor, for leading HMRC to hell in a handcart.
The relationship between taxpayers (definitely NOT "customers"), taxpayers' agents and HMRC is at the lowest I have known since I started in 1958. Very few staff at HMRC know what they are doing, or have any idea how business operates, or the problems which taxpayers have to deal with on a day to day basis so are unable to deal with relatively straightforward matters that come before them. Jim Harra should have fallen in his sword years ago!

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Replying to Jack the Lad:
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By johnjenkins
05th Sep 2023 11:51

65 years in the game. Many congratulations are in order. You have hit the nail on the head. It really is time HMRC gave up trying to administer and let us do it.
Come on Jimbob, before you go, give us back "agent strategy".

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Replying to Jack the Lad:
By SteveHa
06th Sep 2023 10:15

Jack the Lad wrote:

Jim Harra already has a CB, and it is only a matter of time before he gets an OBE at the very least, if not a knighthood like his predecessor, for leading HMRC to hell in a handcart.

I would dearly love to see all of those people receiving knighthoods to be sent to battle with a sword and some tin pan armour to defend the nation, as knights were supposed to.

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By sammerchant
04th Sep 2023 14:37

This information should be given a wider airing. Perhaps Ms Cave could tweet this?

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Replying to sammerchant:
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By johnjenkins
04th Sep 2023 15:39

What for? HMRC aren't interested who they get fines from, nor is the treasury.

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Replying to johnjenkins:
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By JackH
05th Sep 2023 17:57

Question asked in Parliament today at Treasury Questions about penalties where no tax is payable. Govt says "cannot interfere directly" but will look into the matter.

"Commissioners for Revenue and Customs Act 2005

s11 Treasury directions
In the exercise of their functions the Commissioners shall comply with any directions of a general nature given to them by the Treasury."

So Yes they can!

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Replying to JackH:
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By johnjenkins
07th Sep 2023 09:26

Government can do anything when it suites.

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By Brodders
05th Sep 2023 08:25

Why? Three words.

Because they can.

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By ds
05th Sep 2023 13:23

How legal are these so called "penalties"? Are they the equivalent of fines for overdue library books ?
If you believe you are in right and have the evidence to prove it, then don't pay their fines and let them take you to court, produce the relevant evidence and claim compensation for lost time and inconvenience. Their incompetence has to be brought out into full media scrutiny.

The Tax System like many things in the UK are out-dated and broken.

I read today that a German court refused to extradite an Albanian drug trafficker to the UK as the HO authorities couldn't show that the UK prison system is safe and adequate. Consequently, the Albanian has been released.

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