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MTD fails to reduce the tax gap

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The gap between amount of VAT paid and VAT expected to be paid has increased by £2.3bn during the first year of MTD for VAT, undermining a key justification for the MTD programme.

20th Sep 2021
Tax Writer Taxwriter Ltd
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The tax gap is the difference between the amount of tax that should be paid to HMRC, and what is actually paid. The theoretical “should be paid” figure is open to interpretation, and therein lies the crux of the problem in estimating the total tax gap. 

HMRC has produced a tax gap report every year since at least 2009, but each year the comparison figures reported for prior years are adjusted, as data from earlier periods (eg from settled compliance cases) becomes available. It is therefore difficult to draw conclusions from apparent trends as the figures are always imprecise and retrospectively altered.

As Wendy Bradley has pointed out the methodology used in complying the tax gap report still leaves something to be desired. For example, HMRC is still using the US Internal Revenue Service research for creating multipliers to apply to UK data (see sources of error in methodological annex), which is derived from a very different tax system. Most UK taxpayers do not submit a self-assessment tax return which is available to audit for errors and mistakes, but almost everyone submits a tax return in the USA. 

Latest trends

The HMRC report into measuring the tax gaps for 2019/20 reveals that after five consecutive years of a falling rate of the tax gap, there have been a slight uptick in 2019/20. The data for year’s report comes from the period immediately before the COVID pandemic, and the amounts of tax collected have been adjusted for the tax which was deferred at the end of March 2020. 

The total tax underpaid or missing is estimated at £35 billion which is 5.3% of total tax liabilities. This figure was 5.0% of total tax due in 2018/19, and that percentage has proportionately fallen for the previous five years, from 7.1% in 2013/14.

Breaking the data down

The tax gap total is broken down by the perceived causes categorised by these behaviours:

Behaviour: Tax gap

£bn

Percentage of total liability
Carelessness 6.7 1.0%
Criminal attacks 5.2 0.8%
Evasion 5.5 0.8%
Legal interpretation 5.8 0.9%
Non payment 4.0 0.6%
Hidden economy 3.0 0.4%
Error 3.7 0.5%
Avoidance 1.5 0.2%
 Total 35 5.3%

The avoidance category is further analysed into the type of tax, but the other behaviour categories are not.

VAT matters

The VAT gap has risen from £10bn to £12.3bn over 2019/20, lifting the total VAT gap from 7% to 8.4% of total VAT receipts. Table 1.6 of the tax gap tables shows that the amount of VAT lost through tax avoidance is £0.1 bn, and this amount has remained steady at that level over the last six years.

How has the additional £2.3bn of VAT been lost in 2019/20?

As this year saw the introduction of MTD for VAT the amount of VAT lost through taxpayer error and carelessness should surely reduce. In the MTD policy paper HMRC justified the MTD program by saying that it would “reduce the amount of tax lost to avoidable errors”.  

However, HMRC has not highlighted any reduction in the level of VAT lost to taxpayer error, nor has it broken down the total of the tax gap due to carelessness or to taxpayer error, into the different taxes. In fact the amount of tax lost to carelessness has increased significantly from £6.1bn to £6.7bn, and the amount lost through taxpayer error has also increased from £3.1bn to £3.7bn.

John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, commented: “Whilst we recognise that we are in the early days of MTD and the published tax gap data doesn’t allow a granular analysis, we are surprised to see such a significant increase in these elements of the tax gap. MTD is supposed to reduce the tax lost from these behaviours and bring in hundreds of millions of pounds of additional revenue. So far there is no clear sign that this is happening.”

Barnett added: “These figures back up what CIOT have heard from our members – that MTD is unlikely to reduce the amount of taxpayer error and may even in some situations be increasing it.”

The CIOT has also called for HMRC to thoroughly assess the effectiveness of MTD, as well as whether the administrative burden it is imposing on business is reasonable, before it expands the MTD program further.

Replies (80)

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By Paul Crowley
20th Sep 2021 12:15

"Barnett added: “These figures back up what CIOT have heard from our members – that MTD is unlikely to reduce the amount of taxpayer error and may even in some situations be increasing it.”

I have observed the same
Several clients have made whopping great errors, both directions, but made no such errors when thery were working on paper or spreadsheets

The HMRC view that people will notice if paying too much, but not when paying too little is not something that I have observed

All MTD could ever pick up would be error or carelessness (the other categories are deliberate)
Seems to be MTD is failing in its raison d'etre

Is there any reason for the next lot of MTD?

Thanks (18)
Replying to Paul Crowley:
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By djtax
20th Sep 2021 12:46

That forcing taxpayers off simple/manual records etc and onto computer systems would lead some to make more mistakes not less was made clear in the House of Lords Economic Affairs Select Committee Report issued in November 2018 on the then proposed MTD for VAT. HMRC ignored every recommendation of that report. Says it all really. What chance HMRC will take a blind bit of notice on our grass roots experiences in the run up to MTD for Income tax?

Thanks (23)
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By bluebaron
20th Sep 2021 12:24

The entire MTD for Income Tax project should now be abandoned.

Thanks (25)
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By memyself-eye
20th Sep 2021 12:27

You forgot the heading:

"VAT lost from folks that have deregistered following the introduction of MTD"

Thanks (13)
Replying to memyself-eye:
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By Paul Crowley
20th Sep 2021 13:40

Agree
People can be extreme

3 traders so far this year have chosen to deregister
All 3 were below the Registration threshold last year

Thanks (5)
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By AdamMurphy
20th Sep 2021 12:53

No surprises there.

I had clients who kept perfect spreadsheets, moved onto QB et al due to the adverts, and made a right pig's ear of it

Thanks (20)
My photo
By Matrix
20th Sep 2021 13:04

They didn’t listen.

A client moved to software and claimed VAT back on pensions, insurance etc. Had been fine using paper records for decades.

Thanks (21)
Replying to Matrix:
Morph
By kevinringer
23rd Sep 2021 15:57

Most software also claims back VAT on the VAT payment, tax payments, drawings etc. I know a firm of bookkeepers (qualified) that not only made these mistakes, but reclaimed IPT as if it was VAT.

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By Hugo Fair
20th Sep 2021 13:12

"John Barnett commented: “.. we recognise that we are in the early days of MTD and the published tax gap data doesn’t allow a granular analysis .."

Why do our 'representative' bodies (CIOT in this case) act as apologists for HMRC in this way?
The total lack of transparency in the published figures is not a given, it is a deliberate action in order to obfuscate the twin truths that lie (in both senses) at their heart:
1. The 'gap', as Wendy points out, is based on variable definitions and retrospective amendments - so not only doesn't provide the baseline for year-on-year comparisons, it is meaningless within a single year.
2. The lack of base (disaggregated) data makes it impossible to even consider trends within the total - such as areas of tax collection that are getting 'better' or 'worse'. More importantly it prevents any deep digging by statisticians to identify the difference between apparent causes (correlations) and verifiable causes (much trickier to prove).

This could all be accidental or due to laziness/incompetence were it not for the fact that this is how govt has always presented data - in all areas. For instance, take a look at crime figures by region and try to work out any consistency between crime types year-on-year - and look in vain for the breakdown of, say, violent crime by perpetrators and by implement used. Or do the same with drug deaths ... and don't get me started on NHS and health outcomes.

The govt and the concept of transparent, detailed data are destined to be strangers forever!

Thanks (7)
Replying to Hugo Fair:
Quack
By Constantly Confused
20th Sep 2021 14:43

Hugo Fair wrote:

1. The 'gap', as Wendy points out, is based on variable definitions and retrospective amendments - so not only doesn't provide the baseline for year-on-year comparisons, it is meaningless within a single year.

Who is Wendy? :)

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Replying to Constantly Confused:
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By Hugo Fair
20th Sep 2021 15:06

Woops ... should of course have said Rebecca.
[Comes of typing during a Zoom meeting where a Wendy was prattling on - and then not proof-reading to my usual standard].
Apologies all round.

Thanks (2)
Replying to Hugo Fair:
paddle steamer
By DJKL
20th Sep 2021 16:24

Presume the Wendy does not frequent A Web or you could be in big trouble

Thanks (3)
Replying to DJKL:
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By Hugo Fair
20th Sep 2021 16:38

Nah, I'm safe ... the Zoom call wasn't remotely related to Accountancy (much less interesting than that)!
I'm beginning to realise that (a bit like those de-cluttering programmes) I need to cut a few of the strings on my bow ... life post-retirement wasn't really meant to be this busy.

Thanks (1)
Replying to Hugo Fair:
paddle steamer
By DJKL
21st Sep 2021 09:40

I think managing time is like managing clutter, things just arrive to fill the empty spaces without one trying.

Thanks (1)
By ireallyshouldknowthisbut
20th Sep 2021 13:24

Accountants have been patiently explaining for years that computerisation tends to overclaim purchase VAT due to default categories adding in VAT when there is none on the invoice.

Add to this the fact that with "modern" cloud software works from the bank transaction not the invoice suggests widescale overclaiming would be larger than boring old excel accounts or "sit with a pile of invoices an tot 'em up" accounts.

And we haven't even got to "net sales receipts" received from payment processors which are now much more common having VAT applied only to the net receipt and not the gross sale. Small per customer, but can be large sums.

Our anecdotal evidence was ignored and fobbed off. I mean how CAN the computer be wrong?

Thanks (12)
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By Graeme Lindsay Abdn
20th Sep 2021 13:48

Before MTD for VAT was introduced, I pointed out to HMRC that the net VAT 'loss' due to errors and carelessness was stated to be £8bn (if I remember correctly). I asked what steps HMRC were putting in place to measure the extra VAT being collected due to MTD for VAT eliminating the errors? I was told 'none'! Says it all really.

Thanks (4)
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By GHarr497688
20th Sep 2021 13:58

Clients on Sage can enter the full invoice value as Vat and Net so all the invoice is claimed as VAT - Xero happily will let you claim vat on anything from your own personal shopping bills to VAT in a new car - spreadsheets can easily double up a VAT claim with a wrong click. The data is not been checked by the Accountants and the clients just clicks the button and send the VAT to HMRC RESULT = Tax Gap Increases.
HMRC you are playing with fire and you will get burnt.

Thanks (7)
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By Beef curtains
20th Sep 2021 14:44

The idea that MTD would reduce the "tax gap", which is, in any event, a dreamed up figure, is utter balls. It was never introduced for that reason. The proposal was always about greater intrusion into taxpayers' affairs by Revenue snoopers.

Thanks (12)
Replying to Beef curtains:
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By RobertD
22nd Sep 2021 19:38

…. And of course, as it transpires, to introduce quarterly SA tax collecting.

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By Justin Bryant
20th Sep 2021 15:44

But all the above naysayers are surely overlooking the fact that HMRC are never wrong about such things.

Thanks (1)
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By BeardyWeardy
20th Sep 2021 16:58

To all the people saying that MTD is now making their clients make errors: why aren't you reviewing their work and stopping these errors making it to HMRC? Just because we aren't necessary for compliance doesn't mean we can't advise on how to accurately assess for VAT.

Thanks (1)
Replying to BeardyWeardy:
By ireallyshouldknowthisbut
20th Sep 2021 18:26

Curiously HMRC obtain their stats about the "tax gap" from their regular VAT reviews.

Which unless we do their bookkeeping and/or VAT (which we don't tend to) invariably arise BEFORE accountants have 'done the year end' and have had the chance to correct it. This is a long running bug-bear of mine in the dodgy tax gap stats. In that many of the errors HMRC claim are being made, are corrected automatically by agents but this very considerable input is not recognised.

More widely many tax payers are not represented. Or represented by low quality accounts for whom 'its all in the system' and little is checked or reviewed.

Thanks (8)
Replying to ireallyshouldknowthisbut:
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By Paul Crowley
21st Sep 2021 13:54

"Or represented by low quality accounts for whom 'its all in the system' "

I think you mean online types. Most accountants check stuff once a year. Only bookkeping organisations would be involved with check every entry and VAT code before submitting the monthly or quarterly VAT return.

Thanks (0)
Replying to BeardyWeardy:
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By cherrytelevision
21st Sep 2021 09:00

Well, many clients don't want to pay the additional fees for their accountant to review their VAT returns in such detail.

Thanks (6)
Replying to BeardyWeardy:
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By lesley.barnes
21st Sep 2021 09:43

Even if you review the clients work it is very difficult and time consuming with some of the accounting packages to actually spot errors. Some clients believe that because they are paying for software then anything the accountant is doing shouldn't be invoiced because the software has done all the work. In a lot of cases no analysis is done by the client and trying to weed out the rubbish can be a nightmare.
Another recent issue I have had is a number of the banks are introducing their own free versions of software packages to business clients. Accountants are having to get to grips with a number of different formats of software which can lead to client errors getting through.

Thanks (7)
Replying to lesley.barnes:
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By GHarr497688
21st Sep 2021 13:00

Now HMRC are also saying that the software will check you VAT and spot errors.
Standards are dropping and HMRC don't seem bothered and are encouraging it in many ways. I wonder if its ploy to trip people into making mistakes to claim more interest and penalty.

Thanks (2)
Replying to lesley.barnes:
Chris M
By mr. mischief
21st Sep 2021 16:40

When it comes to extra work, my approach is to specify clearly and accurately what is required and how much my fee will be. For example:

Identify the transactions not agreeing to the bank statment and correct them so the bank statement and Xero / QB / Freeagent / Botchsoft balance agrees exactly : £300 plus VAT.

If the client declines, he or she knows exactly what is needed before I am going to look at the accounts. If he or she goes elsewhere, I am fine with that.

Overall it's about 50-50 between those who pay and those who don't. Of those who don't, about 75% manage to sort out the problems and the rest load up the problems on someone else.

Thanks (1)
Replying to BeardyWeardy:
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By Open all hours
21st Sep 2021 10:18

We can review and we can advise but it will be a very long time before clients ‘get it’. Not sure which clients to sack and which to nursemaid. This is not a mess of my own making, why don’t HMRC send someone to sit with the client three nights a week for the next 2 years?

Thanks (4)
Replying to BeardyWeardy:
RLI
By lionofludesch
21st Sep 2021 10:56

BeardyWeardy wrote:

To all the people saying that MTD is now making their clients make errors: why aren't you reviewing their work and stopping these errors making it to HMRC? Just because we aren't necessary for compliance doesn't mean we can't advise on how to accurately assess for VAT.

You've inadvertently addressed a point made very early on to HMRC.

Accountants said compliance costs would go up substantially.

HMRC said they would only go up by a few quid a year and nobody would notice.

Thanks (10)
Replying to BeardyWeardy:
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By Karen whitehead
23rd Sep 2021 12:49

Because they won't pay for it and they believe they are doing it right and don't need us to check it.

Thanks (1)
Tornado
By Tornado
20th Sep 2021 17:19

"MTD fails to reduce the tax gap"

Hands up all those that ever thought it would

Thanks (18)
RLI
By lionofludesch
20th Sep 2021 18:46

Well, bless me !

Who would have thought it ?

Everybody, I suppose.

Thanks (9)
Replying to lionofludesch:
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By VATs-enough
20th Sep 2021 20:56

Ha, ha. Well said.

I was still at HMRC when this shower of sh*te was being touted to front line VAT officers as the greatest thing ever.

All the newbies thought "Ooooh...." and all the experienced officers thought "this won't make a blind bit of difference"

Guess which category were marked down for being 'non corporate' and for not getting on board with the future?

In fairness, it wasn't just advisors that thought it was a complete waste of time.

Thanks (21)
Replying to VATs-enough:
RLI
By lionofludesch
21st Sep 2021 10:16

When this was originally being touted round about five years ago, my immediate thoughts were that accidental errors aren't going to be reduced by making the process more complicated and deliberate errors aren't going to be affected.

Some folk live in a Utopian dreamworld.

MTDfIT - Making Tax Digital for Ivory Towers.

Thanks (6)
paddle steamer
By DJKL
21st Sep 2021 09:49

I wonder how long we now have to wait for HMG to insist nobody may keep their records in digital form (except those with exceptional difficulties conforming) and all vat records must now be kept as paper records.

It is of course all part of the grand plan, apparently we are all returning to the 70s with a three day week , limited food choices (treat of the week being a Fray Bentos S&K pudding), gratuitous football violence and compulsory wearing of flares. Still, could be worse, at least we can also return to 25 minute prog rock masterpieces and triple albums.

Thanks (5)
Replying to DJKL:
RLI
By lionofludesch
21st Sep 2021 10:42

DJKL wrote:

I wonder how long we now have to wait for HMG to insist nobody may keep their records in digital form (except those with exceptional difficulties conforming) and all vat records must now be kept as paper records.

It is of course all part of the grand plan, apparently we are all returning to the 70s with a three day week , limited food choices (treat of the week being a Fray Bentos S&K pudding), gratuitous football violence and compulsory wearing of flares. Still, could be worse, at least we can also return to 25 minute prog rock masterpieces and triple albums.

Proper bound ledgers - that's what we need. Preferably with little locks on. You soon spot if a page has been torn out of a bound ledger.

Thanks (3)
Replying to lionofludesch:
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By Jimess
23rd Sep 2021 09:46

I love those old bound ledgers - one of my first jobs at the firm I worked for when I left school was writing up the ledgers from the ETB - had to be done in those days to ensure proper books and records were maintained. All properly controlled and a trial balance extracted when it was all done, woebetide me if it didn't balance so I took extra care and pride in my work to make sure it was all spot on. LOVED IT!

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Replying to DJKL:
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By Jimess
21st Sep 2021 10:43

Don't forget the power cuts and working by candle light to get jobs done - I wonder what the Health & safety people would make of that now. As for the prog rock masterpieces and triple albums - they never went away for me and are still regularly featured on my record deck.

Thanks (3)
Replying to Jimess:
paddle steamer
By DJKL
21st Sep 2021 11:12

It was getting hold of candles that was the tricky bit. I can also remember my dad coming home really pleased as he had sourced an ornamental paraffin lamp to go with our Hurricane lamp and he also had sourced a large metal container containing about a gallon of paraffin.

We all had to cluster into the same room together and we then sat doing our homework around the solitary lantern we were permitted to use, working in its faint light.

Still, we were hardy, duvets had still to be invented in Scotland so going to bed in an unheated house with just a couple of blankets and a sheet to keep out the cold was the norm.

This time though I am prepared, I have a large collection of firewood behind my garden shed, now just have to get the necessary tinned food to make our Christmas Day meal a feast the Cratchits would have been proud to enjoy- I suppose if one sources enough tins of spam their contents can all be placed together to vaguely resemble a turkey.

Thanks (5)
Replying to DJKL:
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By Ian McTernan CTA
21st Sep 2021 11:45

You were lucky. 250 of us living in shoebox in middle of road...

sorry, couldn't resist!

Thanks (3)
Replying to Ian McTernan CTA:
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By Jimess
21st Sep 2021 12:00

Gosh that was posh - do you mean a whole shoebox!

Thanks (1)
Replying to Ian McTernan CTA:
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By Paul Crowley
21st Sep 2021 13:59

You were lucky

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Replying to Paul Crowley:
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By johnjenkins
22nd Sep 2021 10:32

Funnily enough I was watching a documentary on Monty Python meets beyond the Fringe last night. You could replace the parrot with MTD.

Thanks (5)
Replying to DJKL:
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By Jimess
21st Sep 2021 11:59

I won't miss the turkey - we usually have something else instead - working in the accountancy profession has developed a certain Bah Humbug spirit in me around Christmas - mainly because everyone else is out there having a jolly old time spread across the entire two weeks of Christmas and I am burning the midnight oil trying to get tax returns out of the door. At least these days I don't also have to cook the feast, scour the shops for last minute pressies that various members of the family forgot to get and tear myself three ways on Christmas Day trying to please the in-laws, the parents and Uncle Tom Cobley - and don't even mention the Christmas tree - Bah Humbug! Talking of Christmas Trees does the energy shortage mean that there will be no twinkly lights and flashing reindeer noses in everyones gardens this year? That'll put the cat among the pigeons down my street. They all start dusting off the Christmas lights as soon as Hallowe'en is over.

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Replying to DJKL:
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By Beef curtains
21st Sep 2021 11:56

Sooner the better.

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By North East Accountant
21st Sep 2021 12:13

Who would have thought...........

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By Paul Crowley
21st Sep 2021 19:28

I think this demonstates the lack of joined up thinking in a failing organisation
HMRC had the orportunity to "demonstrate" that the daft MTD project was worthwhile. They failed to bend their thinking and daft assumptions.
They have now demonstrated that MTD increases the tax gap, if assumptions and models remaimed constant.
Is there no oversight in HM Gov?

Thanks (3)
Replying to Paul Crowley:
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By Hugo Fair
21st Sep 2021 20:06

No!
HMRC: "We are the UK's tax, payments and customs authority"
Note: "authority", not a ministerial department of the UK Government. So without direct accountability or oversight - although PAC and NAO prod it occasionally (but without any powers to force change or penalise transgressions).

Thanks (3)
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By HLB
22nd Sep 2021 09:53

MTD has caused the tax gap to increase. No s**t Sherlock!

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By petestar1969
22nd Sep 2021 09:54

ROFL!!!

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