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Tax year basis in place from April 2024

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A Budget policy paper confirms that the switch from current year basis to the tax year basis will happen for all self-employed individuals and partners from 6 April 2024.

1st Nov 2021
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In association with
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In evidence to the House of Lords Finance Bill sub-committee on 28 October, an HMRC spokesperson said the change to the tax year basis was critical to MTD, as without it the quarterly reporting under MTD ITSA would not provide a meaningful estimation of the tax due by the business for the year.

How will it work?

Under the tax year basis all unincorporated businesses will be taxed on the profits arising in the tax year, rather than the profits that are made in the accounting period that end in that tax year (the ‘current year’ basis).

This change will affect unincorporated businesses that do not currently draw-up their accounts to 31 March, 5 April, or a date in between, and they will find their taxable income is accelerated.

The abolition of the current year basis was originally proposed to take place in 2023/24 with a transitional year in 2022/23, to align with the start of MTD ITSA. However, with MTD ITSA delayed for another year to 2024/25, as requested by the CIOT, ATT and LITRG, so has the commencement of the tax year basis.

Transitional issues

The transitional year will now be 2023/24, which could mean double taxation for some businesses as they will be taxed on more than 12 months’ of profits (see example).

If the business has any overlap relief from when the business started, or changed accounting period, these overlap profits will be available to off-set against profits in the transitional year.

Hear more about Making Tax Digital and how the change in the basis period will affect your clients at AccountingWEB Live Expo

The ICAEW understands that there will be more flexibility to use this overlap relief than was set out in the draft legislation published in July 2021. HMRC said in evidence to the House of Lords that it is exploring how to communicate the overlap relief figures to taxpayers.  

Where the overlap relief does not eliminate the additional profits taxed in 2023/24 the taxpayer will have the option to spread that additional profit from the transitional year over five years.

Example

Jenny’s farm makes a regular profit of £48,000 per year and she draws up her accounts to 30 September. In 2023/24 she will be taxed on:   

Year to 30 September 2023: £48,000
Period: 1 October 2023 to 5 April 2024 (portion of profits from year to 30 September 2024) £24,000
Total profits assessed, subject to overlap relief: £72,000

During the consultation on the tax year basis many commentators pointed out that the bunching of profits in the transitional year and the spreading into the next five years could have a detrimental effect on the taxpayer’s entitlement to the personal allowance, pension annual allowance, the HICBC and student loan repayments.

The ICAEW Tax Faculty understands that the government is seeking to address these unintended consequences through changes to the draft legislation which was published in July.

On-going problems

If businesses like Jenny’s farm do not change their accounting period to align with the tax year end, they will have to apportion profits from two accounting periods to complete their finalisation statement (replacement for tax return) under MTD.

This may involve estimating profits from one of those periods. HRMC estimate that 278,000 businesses will have to use provisional or estimated figures on an on-going basis.

 

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Replies (56)

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By Paul Crowley
01st Nov 2021 09:19

"In evidence to the House of Lords Finance Bill sub-committee on 28 October, an HMRC spokesperson said the change to the tax year basis was critical to MTD, as without it the quarterly reporting under MTD ITSA would not provide a meaningful estimation of the tax due by the business for the year."

A feeble reason.
The quarterly reports will be cash reports so will be useless for tax estimation purposes anyway
The video I saw was excruciatingly difficult to watch
Do HMRC top end officials have any idea what the real world is like

Thanks (8)
Replying to Paul Crowley:
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By Rgab1947
01st Nov 2021 09:52

No

Thanks (8)
Replying to Rgab1947:
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By Hugo Fair
01st Nov 2021 11:23

As witnessed by the concept ".. with MTD ITSA delayed for another year to 2024/25, so has the commencement of the tax year basis."
Ignoring for a second all the glaring anomalies and (at best) half-truths about the 'need' for this change and its impact (on the exchequer and on individual taxpayers) ... there's the insanity of having two major transitional projects (that interact with each other) being run in parallel in the same year! I'm practising my Wibble Wibble!

Thanks (7)
Replying to Paul Crowley:
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By adam.arca
01st Nov 2021 09:57

Feeble reasoning, indeed.

Let’s take two things which we want to happen and say they’re linked regardless of the fact that it is very possible to have one without the other (or, even better, neither but let’s not go there).

This isn’t so much a case of tail wagging dog as of my dog’s tail wagging the dog down the street’s tail.

Thanks (6)
Replying to adam.arca:
RLI
By lionofludesch
01st Nov 2021 10:52

Probably the best question posed was "Why did you not notice this before ?"

HMRC witnesses look at each other for inspiration. None forthcoming.

It's just yet another case of HMRC being criticised and just carrying on regardless.

"We're the Government. We can do as we like."

Thanks (8)
Replying to lionofludesch:
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By johnjenkins
01st Nov 2021 11:15

It appeared and is now really confirmed that IT sold MTD to HMRC without HMRC even looking at what the outcome could be. We get the same MTD jargon from all and sundry. I can only liken change of year end to the scammers that tell you there's a package waiting for you but you've got to pay the postage first.

Thanks (5)
Replying to Paul Crowley:
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By Hugo Fair
01st Nov 2021 11:30

Excruciating undersells the experience.

Anyone who has 1/2 hour to spare (or an hour for the full experience) should try https://parliamentlive.tv/event/index/9f844ae3-3d60-4fa6-80bb-5516bfce02ab ... you can have it on in the background whilst attacking your food at lunch (and imagining that the HMRC reps were on your plate at your mercy).

It is an enthralling insight into their total lack of knowledge of how tax works, compounded by a Civil Service language that fails to answer questions (or indeed to make much sense)!

Thanks (4)
Replying to Hugo Fair:
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By johnjenkins
01st Nov 2021 13:07

Only watched the bit up to "MTD has been about a long time why has not the transition period been sorted". OMG what are we dealing with. It really is a case of HMRC hasn't got a clue what they are doing. This is VERY worrying. Unfortunately nothing will be done to stop this madness. The only good thing is HMRC have now recognised we are tax payers not customers.

Thanks (2)
Replying to Paul Crowley:
Tornado
By Tornado
03rd Nov 2021 12:48

This is my first reaction as well as it has already been pointed out many times on AWEB, there are countless reasons why quarterly reporting does not have a snowballs chance in hell of being able to predict tax liabilities.

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By Nebs
01st Nov 2021 09:53

As this will be a forced change of accounting date for many, rather than their choice of when to change, overlap relief should be increased by indexation.

Thanks (9)
Replying to Nebs:
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By lh3f9764bg1g
01st Nov 2021 10:27

Some chance! They won't allow indexation as that would put a dent in their £2 billion bonus money-for-nothing.

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Replying to Nebs:
RLI
By lionofludesch
01st Nov 2021 10:41

Nebs wrote:

As this will be a forced change of accounting date for many, rather than their choice of when to change, overlap relief should be increased by indexation.

I respectfully disagree.

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Replying to lionofludesch:
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By Beef curtains
02nd Nov 2021 16:14

Overlap relierf should have been indexed from the start.

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Replying to Beef curtains:
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By lionofludesch
02nd Nov 2021 16:27

Beef curtains wrote:

Overlap relief should have been indexed from the start.

If it was, everybody would have 6th April year ends and we'd have made no change from the PYB.

No, it would only have encouraged what HMRC was keen to discourage.

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By Barkster
01st Nov 2021 10:07

What about transitional overlap relief from 96/97 ?

Will HMRC be giving us those figures ?

.. as clients who have come to me in the last couple of decades surely won't have their accounts for those years !

Thanks (4)
Replying to Barkster:
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By graydjames
01st Nov 2021 10:17

Agreed, but the article does contain this:

"HMRC said in evidence to the House of Lords that it is exploring how to communicate the overlap relief figures to taxpayers. "

So this is clearly something being looked at.

Thanks (3)
Replying to graydjames:
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By Beef curtains
02nd Nov 2021 16:15

I suspect that's something the Revenue doesn't have!

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Replying to Beef curtains:
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By lionofludesch
02nd Nov 2021 16:28

Beef curtains wrote:

I suspect that's something the Revenue doesn't have!

Yet get it wrong and they'll be on your back.

Don't kid yourself.

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By petestar1969
01st Nov 2021 10:10

I remember years ago when we switched from the prior year to current year basis and had that daft aggregation (or whatever it was called) year.

At the time, one of the partners (I'd been working in accountancy about 3 years at the time) suggested we change every client's year end to 31 March and he was, quite rightly, laughed at.

Here we are about 30 years later (when it comes in) and his idea is now being forced on us.

Yet another reason to retire from accountancy in April 2024......

Thanks (2)
Replying to petestar1969:
RLI
By lionofludesch
01st Nov 2021 10:43

petestar1969 wrote:

I remember years ago when we switched from the prior year to current year basis and had that daft aggregation (or whatever it was called) year.

At the time, one of the partners (I'd been working in accountancy about 3 years at the time) suggested we change every client's year end to 31 March and he was, quite rightly, laughed at.

Here we are about 30 years later (when it comes in) and his idea is now being forced on us.

Yet another reason to retire from accountancy in April 2024......

I wouldn't have changed it in the transitional year. If I'd wanted to change it, it would have been in another year.

Thanks (1)
Replying to lionofludesch:
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By petestar1969
02nd Nov 2021 13:50

That's the point I was making.

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By johnjenkins
01st Nov 2021 10:17

Not a pretty sight. HMRC are continuing down the road going to oblivion. I look every year at my S/E clients with a view to switching to 31st march ( I have about 12 now). Each one will pay loads more tax, but they haven't the money to pay so it's all well and good someone saying HMRC will get another £2b. Pray tell where the money will come from?

Thanks (5)
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By kdbr
01st Nov 2021 10:18

And the push back from the professional bodies is...

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Replying to kdbr:
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By Paul Crowley
01st Nov 2021 12:30

And always will be nonexistant

Thanks (3)
Replying to kdbr:
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By AdamMurphy
01st Nov 2021 14:18

They're too busy counting the money rolling in from the subs for no benefit.

Thanks (2)
Replying to kdbr:
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By Beef curtains
02nd Nov 2021 16:16

Missing, as usual

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Replying to kdbr:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
02nd Nov 2021 17:50

While I hear frequent complaints about the lack of action from the pro bodies, I've made the point before that a collective protest from several of them may have helped influence the Treasury to delay the imposition of MTD ITSA to 2024.

Many of them also prefer the quiet back channel approach to diplomacy (which also suits HMRC), which doesn't help flag any gains they do make. So when they do get it together to raise their voices in public, I think it's only fair to credit their efforts:
https://www.accountingweb.co.uk/tax/hmrc-policy/delay-basis-period-refor...

Thanks (1)
Replying to John Stokdyk:
Stepurhan
By stepurhan
03rd Nov 2021 05:25

With all due respect, a simple delay instead of addressing the fundamental problems seen by grass roots accountants is not much to crow about. Add to that the fact that they only "may" have helped influence that delay and I think it is fair to say they have put in a poor showing on this.

You say they prefer the quiet back channel approach which also suits HMRC. Perhaps them acting to suit HMRC, rather than their members, is the real problem.

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Replying to stepurhan:
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By johnjenkins
03rd Nov 2021 09:42

First Giles, then Rebecca and now John. The only reason for the delay is that IR35 has more or less ground the work on MTD to a halt. HMRC aren't interested in what we say, they don't even listen to sub-committees. The only time they will actually listen is when it all collapses around their ears, which, if they don't sort IR35 out, will be very soon.

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By aftab naeem
01st Nov 2021 10:26

Completely illogical path to adopt.

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By johnkcound
01st Nov 2021 10:27

The only truthful evidence HMRC could have given the House of Lords in respect of overlap relief is that they have no idea of the amount of relief t0 which taxpayers are entitled.

Thanks (3)
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By johnjenkins
01st Nov 2021 10:31

There is a way around which involves a limited company and some bendy line transactions (not illegal) which no doubt has already been thought of.

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By SteveHa
01st Nov 2021 10:33

Quote:
an HMRC spokesperson said the change to the tax year basis was critical to MTD, as without it the quarterly reporting under MTD ITSA would not provide a meaningful estimation of the tax due by the business for the year.

I'd like an HMRC spokesperson to explain how a tax year basis will?

Thanks (7)
Replying to SteveHa:
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By johnjenkins
01st Nov 2021 10:45

We all know it won't. More coning by HMRC to try and sell MTD. Sorry mate nobody is buying.

Thanks (7)
Replying to SteveHa:
RLI
By lionofludesch
01st Nov 2021 10:47

SteveHa wrote:

Quote: an HMRC spokesperson said the change to the tax year basis was critical to MTD, as without it the quarterly reporting under MTD ITSA would not provide a meaningful estimation of the tax due by the business for the year.

I'd like an HMRC spokesperson to explain how a tax year basis will?

Quite. And particularly if you consider that, for folk with years ends other than March, the profits being taxed aren't actually those of the tax year but of time apportioned profits of two different accounting years.

Suppose Covid-24 comes along in April 2024 and disrupts your business for a year. You have a September year end. How accurate will your tax estimate be ?

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By North East Accountant
01st Nov 2021 12:58

At last....... some reward for carrying forward the overlap profit on tax comps for the last 20+ years.

I suggest we all write to HMRC on say 14/02/22 asking for the figures where we don't have them and ask for a reply within 30 days.

This will give us a chance to get a reply from HMRC by the the transitional year comes in, a few years later.

Thanks (4)
Replying to North East Accountant:
RLI
By lionofludesch
01st Nov 2021 13:05

North East Accountant wrote:

At last....... some reward for carrying forward the overlap profit on tax comps for the last 20+ years.

I suggest we all write to HMRC on say 14/02/22 asking for the figures where we don't have them and ask for a reply within 30 days.

Or, if you want to be mischievous, you could ask for all clients.

Including those with 31st March year ends.

Thanks (3)
Replying to lionofludesch:
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By Paul Crowley
01st Nov 2021 13:22

Some software will have made calculations for that date
Unless we have acted from start to finish on 5th April, that request is not unreasonable.
Admitedly the figures will be trivial

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Replying to Paul Crowley:
RLI
By lionofludesch
02nd Nov 2021 16:25

Paul Crowley wrote:

Some software will have made calculations for that date
Unless we have acted from start to finish on 5th April, that request is not unreasonable.
Admitedly the figures will be trivial

They'll be zero. I read s209 ITTOIA as being mandatory, though I'm open to correction.

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By Mr J Andrews
01st Nov 2021 13:05

Jenny's Farm appears to be doing well. Profits two years running !
But I'm struggling to get my head around ......''the Govt's seeking to address unintended consequences through changes to draft legislation.....''
Possibly meaning ''.....We really haven't thought this through , chaps.....''

Thanks (10)
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By Ralph-gab
01st Nov 2021 15:28

HMRC seem to think that we go into business for the pleasure of working for them. They used to be required to minimalise compliance costs, but now they don't seem to be interested at all in the burdens placed on OMBs, and nobody challenges them. We do have one client with a 30th June year end and we do have the overlap relief figures from 1995/96! Technically it's transitional relief as the business was trading before the change from prior year to current year assessment. I do the MTD VAT for one client who used to do his own and he continually complains about the cost. In theory his accountant should have less to do as everything is already on the software.

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By tedbuck
02nd Nov 2021 14:56

Well at least HMRC are consistent - they are saying that the quarterly returns are essential on the one hand to help HMG micromanage the economy and their press office on the other hand is saying that it is a 'light touch' situation so the information is really to check that people are obeying the dictat of keeping their records on a computer.
Not sure if this is 1984 or the prelude to a Communist State but neither sounds very attractive.
Nice to see the professional bodies being so pro-active and standing four square against HMRC.
We could always have a protest and file all the SARs on the 31st January but then HMRC's system wouldn't work and there would the devil to pay............
Or perhaps we should send automatic reminders about all the unanswered letters - that would keep them busy as they wouldn't know which ones to bin and which to put to one side.
And follow that up with a bill for the time wasted in trying to get a response from HMRC.
But most of all Joe/Joanne Public should be made aware of what he or she is going to be expected to do because at the moment they are blissfully unaware.
This is what happens when you put lunatics in charge of the asylum - not sure if that is HMRC or HMG!

Thanks (1)
Replying to tedbuck:
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By johnjenkins
02nd Nov 2021 15:25

"they are saying that the quarterly returns are essential on the one hand to help HMG micromanage the economy and their press office on the other hand is saying that it is a 'light touch' situation so the information is really to check that people are obeying the dictat of keeping their records on a computer."
Only thing wrong with that is you can add up your income and expenses on an adding machine (could that be digital) but as long as you put the totals on a bit of software, job done.
As this farce progresses it is plainly obvious to everybody that this hasn't been thought through. How much more stick will HMRC take before they either collapse or give in to common sense cos we aren't going away.

Thanks (3)
Replying to johnjenkins:
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By Hugo Fair
02nd Nov 2021 16:37

Agree with regard to 'digital records'.
As far as I can tell (and NOTHING is absolutely clear about this even at this late stage) ... the only thing you are forbidden from doing is typing values into the actual submission file (which must be generated either by 'MTD software' or by 'MTD bridging software').

But as you say, there's nothing to dictate how you must (or must not) get those values into a file that is then read by the MTD software prior to submission!

So ... there just *might* be a seamless series of transmissions that require no intervention by human hand (i.e. the image portrayed by the software vendors of bank feeds and onwards).

But it's far more likely that most taxpayers will end up with a hybrid of random 'solutions' ... ranging from data that reaches them already in a digital state but is probably manipulated prior to reaching MTD software, to data that arrives on various scraps of paper before being keyed-in to the MTD software - and all points in between.
Those that like to be 'in control' will probably use a spreadsheet as the target for holding all these transactions 'digitally' ... and many will be happy to continue thinking it's a problem that can be left to a book-keeper.

However, as you hint, there is a common factor to all these organic 'systems' (and it isn't MTD digital records). It is that the source of the MTD digital records will remain entirely editable by the taxpayer before it's even considered for summing and sending to MTD.
So the honest (but inexperienced) taxpayer won't change their M.O. but will either be charged more or submit data that is an unknown unknown in terms of accuracy ... and the dishonest taxpayer will have more camouflage behind which to hide their nefarious porkies!

Thanks (3)
Replying to Hugo Fair:
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By johnjenkins
02nd Nov 2021 16:46

I've said this before and I will, no doubt, say it again. Forget what I think about mandatory MTD. I have looked at every angle, every possibility (limited by my thought power) to try and justify what HMRC are saying and how it could work. I come up with the same thing,. Mandatory MTD with quarterly updates for the self employed earning over £10k will fall flat on its face, because there will be too many business that won't be able to cope. It's that simple.

Thanks (2)
Replying to johnjenkins:
RLI
By lionofludesch
02nd Nov 2021 17:01

johnjenkins wrote:

I've said this before and I will, no doubt, say it again. Forget what I think about mandatory MTD. I have looked at every angle, every possibility (limited by my thought power) to try and justify what HMRC are saying and how it could work. I come up with the same thing,. Mandatory MTD with quarterly updates for the self employed earning over £10k will fall flat on its face, because there will be too many business that won't be able to cope. It's that simple.

Can't disagree with that.

Though it depends on how keen HMRC are to collect penalties. Avoiding a fine every quarter might pay for your bookkeeper.

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Replying to lionofludesch:
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By johnjenkins
03rd Nov 2021 09:30

So the choice is fine or bookkeepers fees? Why should there be costs for nothing?

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Replying to johnjenkins:
RLI
By lionofludesch
03rd Nov 2021 10:53

Happens all the time. What about the data protection fee? £35 for nothing.

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Replying to johnjenkins:
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By lionofludesch
03rd Nov 2021 10:54

Happens all the time. What about the data protection fee? £35 for nothing.

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By lionofludesch
02nd Nov 2021 15:37

Is it just total receipts and total payments they need ?

Will the proprietor's "wages" be in there ?

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