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Second loan charge review underway

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Sir Amyas Morse will conduct an independent review of the controversial loan charge and report his findings to the Chancellor Sajid Javid by mid-November 2019.   

12th Sep 2019
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As part of his campaign to become Prime Minister Boris Johnson promised to review the loan charge, and when he got the job he followed through on this promise.

The loan charge lobbyists were told that this review would be independent, and indeed it will be led by the former head of the National Audit Office (NAO) Sir Aymas Morse. He is a well-respected figure who was formerly the global managing partner of PwC before he led the NAO for ten years, holding the government to account on its spending.       

Terms of review

Morse will consider whether or not the loan charge is the right way to collect tax due from the use of disguised remuneration schemes (including contractors loans), and as such his review will be much wider than the first HMRC technical review. That review was branded a whitewash as it did little more than restate the technical operation of the law and didn’t examine its effects on individual taxpayers.   

We don’t yet know the boundaries which Morse will work within for his review, but he is expected to report back to Sajid Javid by mid-November. This doesn’t provide much time to take statements from a wide range of witnesses including HMRC officers, Treasury officials, taxpayers, and tax advisers, and to weigh up all the evidence.

Highly charged

The imposition of the loan charge has been highly controversial and has arguably driven some people to suicide. HMRC and Treasury officials have been accused of manipulating facts in order to justify their actions in respect of the loan charge. Whilst lobby groups have been relentless in their campaigning, pursuing certain Treasury Ministers and anyone who doesn’t condemn the loan charge on twitter.  

The Loan Charge All Party Parliamentary Group (APPG) has conducted its own inquiry into the loan charge which reviewed a large body of evidence collected from hundreds of affected taxpayers and from HMRC.

In response to the Morse review announcement the Loan Charge APPG has written to the Chancellor demanding that it must be genuinely independent of HMRC and the Treasury. Leading barrister Keith Gordon is also troubled that the review will be staffed by HMRC and HM Treasury civil servants, which could lead to a perceived conflict of interests given that HMRC and HM Treasury are likely to come in for a lot of criticism.

No suspension

The APPG has also asked for all settlement activity (tax agreements with HMRC), enforcement and penalties to be suspended pending the outcome of the loan charge review and the implementation of the recommendations. However, that is not going to happen.

HMRC has made it clear that taxpayers who have agreed a settlement with HMRC and are paying the tax due by instalments should carry on making those payments. Those who provided information to HMRC before 5 April 2019, but have yet to reach a settlement can continue with the settlement process or wait for the outcome of the review.

Those who have decided not to pay tax on their disguised remuneration loans and are instead due to pay the loan charge need to provide information to HMRC about their outstanding loans by 30 September 2019.

A brief history   

The loan charge was designed to encourage taxpayers to pay income tax, national insurance and interest which HMRC believes to be due on loans they received in years going back to 1999. HMRC refers to those loans as “disguised remuneration” on the basis that they were never designed to be repaid, and hence the loaned amount should be taxed as if it was salary paid in the year it was provided.

Many taxpayers did not agree with HMRC’s view of the loans, and if they did agree they believed that the employer should be liable for the tax and NIC on the loan, rather than the individual. Arguments ground though the courts and in some cases HMRC did not act quickly enough to challenge the tax treatment before tax years were closed to enquiries.      

Sledgehammer

The loan charge was proposed in the 2016 Budget to close down all the arguments about disguised remuneration, one flavour of which is contractors’ loans. All taxpayers who had not agreed their tax liabilities in respect of disguised remuneration loans by 5 April 2019 would have to pay the loan charge imposed at that date.

The loan charge taxes all outstanding loans as if the amounts were received as salary in 2018/19. The professional accounting bodies, including ICAEW, raised strong objections to the draft law, pointing out that taxpayers would become insolvent. However, the law was passed after the 2017 general election in the second Finance Act for that year.

Replies (73)

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Replying to whitevanman:
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By Exfoliate
17th Sep 2019 15:46

So what you are saying is it's ok to hang the innocent for the greater good of HMRC's lax approach to blocking the problem when they had chance. There are 2.4 mln reasons why I am not feeling particularly comfortable with HMRC and their part in this legislation.

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Replying to Exfoliate:
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By whitevanman
17th Sep 2019 16:15

I don't say it is OK, I merely offer a suggestion as to why the legislation says what it does. If the loan in your case was repaid before the legislation was published (more than 3 years ago now) I might have some sympathy. If not, I am afraid you dont have a legitimate complaint. You mention 2.4 mln reasons for your dissatisfaction and from that I assume we can guess at the amount of tax that you sought to avoid. So again, not likely to attract a lot of sympathy.
Incidentally, again you comment on HMRC's lax approach and failure to block the schemes when it could have done so. You are not the only one to hint at this sort of thing. Can you enlighten us as to what exactly your reasoning is here. Why were they lax, in doing (or failing to do) what. When and how could they have blocked the schemes and what was it that made a particular point in time more appropriate?

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Replying to whitevanman:
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By Exfoliate
17th Sep 2019 16:55

The issue should be between genuine and non genuine loans surely or has that been forgotten somewhere down the line. If there is interest, security and repayment terms which are and can be honored then it's a loan, and HMRC should not be allowed to intervene in what is after all a genuine commercial transaction, or are you saying that's perfectly OK.

And how lending money from a trust of the settlor to the settlor's subsidiary company has saved me personally paye and nic I would really love to know. The money is not in my pocket and I have received no personal benefit from the loan. The settlor's subsidiary has benefited as has the trust, both of which properly account for tax.

I agree with you that those who took loans knowingly they did not carry interest, did not have any security and there was no intent to repay, flouted the tax system. I think that's obvious and you don't have to be a tax expert to understand something was too good to be true.

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Replying to Exfoliate:
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By Wilson Philips
17th Sep 2019 17:02

I suppose the most obvious question is - why did you participate in the scheme?

Did you believe that the loan was going to have to be repaid?

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Replying to Wilson Philips:
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By Exfoliate
17th Sep 2019 18:06

Let me answer your question, you may recall the banking crisis of 2008 when banks unceremoniously withdrew credit and recalled loans. What would you do as a company to protect assets against these unscrupulous b------s . Place them out of reach in to a safe haven or let the take you for all you've worked for? I think that should answer your question as to why trusts are often a very good tool.
Once the money is in the trust then it has to be put to work - again seems reasonable? The settlor subsidiary had been promised (by the banks) a loan to complete a property development, that was withdrawn of course so the settlor subsidiary company requested a loan from the trust on commercial terms. Had Brexit not happened I'm certain the property would have sold, the settlor's subsidiary would have made a capital gain, repaid the trust in cash and all would be well in the world. But of course it's not. As all the documentation supports this why would you suggest the loan would not be repaid?

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Replying to Exfoliate:
Psycho
By Wilson Philips
17th Sep 2019 19:06

So, it was an entirely commercial decision, and the thought of saving tax never entered your mind?

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Replying to Wilson Philips:
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By Exfoliate
17th Sep 2019 19:17

How do you save paye and nic or any kind of tax by making a none corporate tax deductible contribution to a trust and then making a loan to a subsidiary of the settlor ? So if there hasn't been any tax saving anywhere why would it enter my mind ?

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Replying to whitevanman:
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By Exfoliate
17th Sep 2019 16:58

As to your final point, HMRC could quite easily have said and introduced legislation as early as 2002 stating that all loans from trusts were to be treated as income and paye and nic would apply accordingly. Doesn't appear to be difficult to introduce legislation in 2017 so why couldn't they have done so 15 years earlier?

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Replying to Exfoliate:
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By justsotax
17th Sep 2019 17:11

I would have a word with Justin, its the guys he is defending who have got us to this point. We have all been their....everyone is enjoying pushing the boundaries and then somebody (in this case many) decide to take the p.....so everybody gets treated the same.

You should point your anger in the direction of Justin and his band of brothers as much as the revenue.

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Replying to justsotax:
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By Exfoliate
17th Sep 2019 18:17

You asked me the question why I thought HMRC had been lax. Had I been working for HMRC at the time and seeing what was going on, I would have got the legislation introduced 16 years ago. So if I sat on my hands for 16 years I am as responsible if not more so that the Justin's of this world, don't you agree? HMRC however want their cake and eat it, and it is they that can introduce 'retrospective' legislation to cover their own backsides. I cannot comment on those that peddled these schemes as to whether they came with a word of warning, where they didn't then that's a different matter because they should have.

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Replying to Exfoliate:
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By whitevanman
17th Sep 2019 19:59

In answer to the several points you make, I would say it is surprising how naive some people are.
Why do you refer to 2002 as being a time at which legislation could have been introduced? What is special about 2002?
These types of arrangement have been around since the late 1970's (that I am aware of). Over the intervening years there have been many attempts to bring in more effective legislation followed by numerous iterations of schemes on a similar theme.
Will you please firstly note HMRC do not legislate. They are a government department. If they find schemes ( and DOTAS has not always applied and is still said not to cover some schemes) they use the law as is to try to collect tax as appropriate. Ultimately that might mean going to court which can be a very long process. At the end, if they succeed, they seek to apply it more widely but quickly find users arguing that their case is different. So on it goes. If they lose, the question is, what can or indeed should be done.
It is not for HMRC to decide. They tell ministers (which in effect means the Chancellor). They will estimate the likely cost of doing nothing and the consequence of legislating. It is for the government to decide whether to do anything.
With that in mind, look at the vast array of governments we have had over the last 30 years (or indeed a shorter period). Some may not have wanted to do anything drastic because they didn't see the need or it wasn't politically expedient. It is likely that austerity caused a re-think. That is not to say the government thought it a great idea. Just that to do nothing and be found out might be politically ďamning.
These are the type of things that actually give rise to legislation, not the bleating of HMRC.
S o please, let us direct ourselves to the right people.
The government introduced the legislation for reasons you can guess at (they certainly haven't told us, or at least not the full truth). You can guess they were finally p***sed off and sought to do something that sent out a message.
Also, I think (and I have no evidence for this) that as with other areas of tax, they became more concerned when "ordinary" people (like those working for NHS say) started to get in on the act. Where would it all end?
So, as always, there is no one simple answer. This is something that has developed over 40 years or so and almost inevitably, the end result is hard ( for some at least).
Yes it catches some cases that you or i might feel are unwarranted but again, i would ask you to frame legislation that hits all the right cases and leaves unaffected all those you think are "deserving". You will soon figure out that it cannot be done.
So, do nothing, lose £billions from what the public might regard as the undeserving few (50,000 is actually a small number when looking at an adult population of say 40 million) or be seen to be hard on avoiders and hit one or two (in overall terms) innocents. Which do you think reads better in the press?
You took action to protect your assets. The Chancellor has taken action to protect the nations assets. You don't have to like it but at least try to understand the bigger picture.
Call me cynical but the only reason we are having a review is that there have been reports of suicides. The one thing politicians would fear more than the criticism for doing nothing (as above) is being blamed for one or more people taking their own lives. It's not that they necessarily care but bad publicity can seriously damage at the polls.
So, I don't say I agree (or disagree) with any one case. Nor do I say I wholly agree the legislation. What I do say is that I understand some of the issues and some of the difficulties faced by the government and HMRC. As a member of the public who has always paid my full measure of tax and NIC, you will have to forgive me if I don't have a great deal of sympathy with those who use schemes which might allow them to avoid doing likewise (however they choose to justify their actions). But as I said before, I do sympathise with some who have been effectively forced into these arrangements and have gained little if anything. And, irrespective of such comments, I would love to see a government take action (punitive) against promoters and others who tout these schemes. But that is just a dream.

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Replying to whitevanman:
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By Exfoliate
18th Sep 2019 14:00

Long answer. I will try and be brief in my response. HMRC act for the Government and whilst I agree with your legal synopsis it is HMRC that present matters to the Government to do something about it. Whether HMRC feel they did enough over the years to get respective governments to do what they did in the FA 2014 and FA 2017 I have no idea. The point about 2002 is that Dextra and the legal result allowed people to think well the law allows this so if that's the case let's do it. I think most people take advantage of a lower tax bill if presented to them, however where we do agree is that this clearly was a case of pushing the boat a bit far, but then again Film Partnership Schemes were even worse. For my part I believed I could not be touched because it was not a loan to me, it was a genuine loan on commercial terms and most importantly there has been no tax saving, so I am sure you appreciate I am naturally p-----d off with how HMRC are treating me, refusing to sit down, look at the evidence and make a judgement, then I can get on with my life. I do however think and I don't see how you could really disagree with me, this has gone on far too long, whether HMRC or the Government and as I recall when they made a mistake on SSAS contributions allowing a tax deduction and loan back to the company, they did not introduce retrospective legislation. I think if you or I say an asset at undervalue, that's our mistake we don't get chance to go back and retrospectively put ourselves back in the right position. Either HMRC or the Government screwed up and sat on their hands far far too long. In my humble opinion.

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Replying to Exfoliate:
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By Exfoliate
18th Sep 2019 14:06

I should have said sell an asset.

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Replying to Exfoliate:
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By justsotax
18th Sep 2019 17:08

as mentioned have a chat with Justin, I am completely sympathetic but the law of unintended consequences that has caught you is because of the many who have avoided tax....and that Justin seeks to defend (because, he will claim his cases are exactly the same as you)

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Replying to Exfoliate:
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By whitevanman
18th Sep 2019 19:07

I think justsotax has said it very succinctly but I will re-state one or two points.
The state of legislation at any time depends very much on the political scene.
It is impossible to assert failings by HMRC when we don't know what the attitude of ministers was from time to time. Also, you do need to have regard to the numbers. In the earlier years there were far fewer users and much smaller amounts of money "sheltered". In 2017 we are told there were more than 50,000 cases. We don't know exactly how much was involved but if each has only £100k the amount involved is £5bn. In reality, with multiple years and most cases involving a lot more than £100k, I think you can see the scale of the problem (some estimates put the tax "at risk" in excess of £5bn).
Pre Dextra, HMRC did not accept the schemes on any level. Promoters argued that contributions were tax deductible and the loans or other amounts were not taxable. Dextra addressed only the first point and took a number of years to become final. Getting suitable cases to court is always difficult for a variety of reasons. Also, getting legislation changed / introduced is never as easy as you seem to believe. Ministers will usually prefer to tinker round the edges rather than attack a problem head on ( look at what is happening now).
We do agree matters have gone on too long and I think the measure brought in shows that recent chancellors agree (at least 1).
The fact you have been caught by the legislation is no doubt attributable to the need to have a very widely drawn measure to prevent promoters slipping through the loopholes (again). The fact that it has an apparently retrospective effect is no doubt due to the current state of litigation and the amounts involved (probably considerably more than in film partnership, SSAS issues).
Where I do sympathise with you is in your dealings with HMRC. Whatever the circumstances they should always be ready and able to discuss how the legislation applies (or is considered to apply) to a persons case and there should be no exceptions.

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Replying to whitevanman:
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By justsotax
19th Sep 2019 09:31

has justin disappeared....?

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Replying to justsotax:
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By Exfoliate
19th Sep 2019 10:02

OK but isn't it a consequence of Government/HMRC, and I don't wish differentiate the two, HMRC work strictly on behalf of the Government that those 50,000 cases you mention would never have happened had the the Government and HMRC acted quicker, and let's be honest in a 'reasonable' time frame.

As I say I am not defending because I too feel we should all pay a reasonable amount of tax, but neither am I hypocritical to the argument that we have most likely all been involved to some degree in avoiding tax which is our natural legal right.It is shameful that loans made from companies to directors and employees all carried well known and enforceable consequences but loans through trusts were 'allowed' to slip through the net.

Do I suspect a lot of well off MP's/Lords and Civil Servants had been doing such trust loans for many a year?

What gets my craw is that people such as Margaret Hodge deplore anyone who circumvents a supposed fair system but is happy for her and her family to benefit from loopholes.

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Replying to Exfoliate:
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By whitevanman
19th Sep 2019 11:48

Can I reply in a somewhat obtuse way (you will hopefully get the point).
Since at least the 1980's it has been common for directors (particularly those of close companies) to have "paid" themselves by way of dividends rather than salary. Many of those writing in Aweb will have encouraged this as being perfectly normal and acceptable tax "planning". Government and HMRC did nothing to discourage this.
Fast forward to (say) the 2000's and society has changed. Employers want to avoid liabilities as an employer and more individuals are becoming "self employed'.
The professionals see the opportunities this presents. We then have numerous iterations of the same "scheme" the object of which was to use the status to engineer tax savings. So, we had a proliferation of companies set up so that the individual could benefit from dividends (and one or two other benefits).
Why did government then choose to take action against these arrangements? Also, when they did so, why choose the rather convoluted IR35 etc?
Simple. They could stand it when the number of people taking advantage of these arrangements was limited. But if everyone could get in on the act, that was not acceptable.
So why not stop it altogether? They obviously didn't want the political consequences of putting "further" taxes on the "genuine" business owners. So what they introduce is a fudge (and numerous unsavoury versions over ensuing years).
Also, some years ago, a case called PA Holdings was taken in connection with mainly NIC. A (perhaps unwanted by some) consequence was that the court ruled that dividends paid for services were nonetheless remuneration (and should be taxed as such and not as dividends).
Did we see a rush from HMRC to apply this to all cases? No. There may be several reasons for this but it is rather suggestive of a political motive driven by ministers not HMRC.
I suspect it was this type of thing and the possible public disapproval, which led to the changes in tax treatment of dividends which followed shortly after. Happily (for some) they did not act retrospectively (but of course they couldn't).
Legislation owes little to fairness. It is simply what governments feel is expedient at the time and in the prevailing circumstances. When too many put their snouts in the trough and there is a risk the public will find out, don't be surprised when the reaction is somewhat inconsistent or even "retrospective". And certainly don't expect sympathy from the vast majority.

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Replying to whitevanman:
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By Exfoliate
19th Sep 2019 13:30

You appear supportive of HMRC rather the Government, so let's agree the Government make the legislation under which we all are obliged to follow and target them. Governments clearly can do what they like even retrospectively, unfortunately the Magna Carter no longer protects the common man from the Crown or in this case the Government. You only have to listen to the latest on Brexit to understand we are led by a bunch of less well educated individuals with few morals and hypocritical beyond belief. I do live by a principle that if it's the law, then changing the law is acceptable, to retrospectively change the law I do not agree with. After all where could retrospective actions by the Government end ?
I agree dividends paid through service companies instead of employment income and non genuine loans instead of employment income are wrong but we are all entitled to manage our affairs to reduce our tax bill, following the of course law. And like it or not the law had decided that loans made by trusts were legal.

The problem with retrospective legislation is it makes us all uncertain and leads to no decisions being taken. That I appreciate is a much wider issue but.......

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Replying to Exfoliate:
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By justsotax
19th Sep 2019 13:39

I think the only issue with your whole response is the use of the word 'loan' on your second to last paragraph.....loans are repayable....which even in its 'retrospective' nature (if I were to concede that point) would mean that the individuals should expect to repay said loan....and the fact is that no one ever expected to repay these loans....that's why the scheme works......it is that simple.....really....

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Replying to Exfoliate:
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By whitevanman
19th Sep 2019 14:02

It's not that I am supportive of HMRC. I just don't like what I see as lazy, inaccurate comment which adds nothing but confusion to discussion of these issues. If you want to complain that HMRC haven't replied to your letters, fine. But if you want to complain about the legislation, direct your anger where it belongs (and that is not only the government).
There is a lot you and I agree on but I am not sure that I have seen a case where the courts have said loans made by trusts are legal (they might have found in favour of an appellant based on the specific facts etc). In any event, no-one has actually said they are illegal. The point is that it may prove impossible to prove that loans are not "genuine" because the only parties who can prove it are the trustees and the scheme users and neither of those is saying anything. Further, there is little sign that the 50,000 cases will be settled anytime soon.
So, government has legislated and despite what it looks like, they can legitimately say it is not retrospective (but maintaining that stance means HMRC cannot calculate the tax over a period of years (as some seem to prefer)) and must calculate it as a 1 year charge.
These and others are all consequences of promoters and users pushing too hard. There is a lesson there and some are learning it the hard way. If you want certainty, don't use schemes that at best, rely on presenting something as other than it really is (ignoring the legal niceties).
Sadly the lessons will not affect the promoters etc who have made fortunes out of these schemes and that is where I would like to see government direct their attentions.

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By AndrewV12
25th Sep 2019 10:36

'The imposition of the loan charge has been highly controversial and has arguably driven some people to suicide.'

Really

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By stevehoward
08th Nov 2019 22:24

I think that we are loosing sight of the fact that the the users of these schemes are tax tax cheats, albeit that they signed up on the advice of their trusted professional advisors.

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