Archive for March, 2014

Tax Diary April/May 2014

Monday, March 31st, 2014

 

  • 1 April 2014 – Due date for Corporation Tax due for the year ended 30 June 2013. 
  • 19 April 2014 – PAYE and NIC deductions due for month ended 5 April 2014. (If you pay your tax electronically the due date is 22 April 2014.)
  • 19 April 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2014. 
  • 19 April 2014 – CIS tax deducted for the month ended 5 April 2014 is payable by today.
  • 19 May 2014 – PAYE and NIC deductions due for month ended 5 May 2014. (If you pay your tax electronically the due date is 22 May 2014)
  • 19 May 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2014.
  • 19 May 2014 – CIS tax deducted for the month ended 5 May 2014 is payable by today.
  • 19 May 2014 – The payroll forms P35 and P14s must be filed by this date – employers late in filing these forms may receive a penalty.
  • 31 May 2014 – Ensure all employees have been given their P60s for the 2013-14 tax year.

State Pension and tax

Monday, March 31st, 2014

If you have recently started to receive your State Pension, you may, or may not, have noticed that it is paid without deduction of tax. This can have a number of unforeseen tax consequences:

  • If your total income including your State Pension is less than your personal tax allowance then there is no tax to pay and you can spend your pension, no problem.
  • If you are still in business and self-employed, and if your self-employed earnings exceed your personal allowance, then you will need to save part of your State Pension to cover tax due. The amount you will need to put by depends on your marginal rate of tax.
  • If you are employed, or if you receive private pension payments, HMRC may adjust your code number(s) to recover tax due on your State Pension. However, this process does not always recover the correct amount and you may receive a bill after the end of the tax year for any arrears. And occasionally, you may have overpaid and you will receive a rebate.

 If you are concerned that you may be overpaying tax, or should be reserving for future tax and are unsure how much to put by, please contact us.    

HMRC is changing the way they charge interest on late paid PAYE

Monday, March 31st, 2014

Employers should note that HMRC is changing the way they charge interest on unpaid PAYE from 6 April 2014. We have reproduced below HMRC’s recent Helpsheet:

 For the tax year 2014-15 onwards:

 HMRC will charge in-year, rather than annual, interest on all unpaid:

  • PAYE tax and Class 1 National Insurance, including specified charges (estimates HMRC makes in the absence of a PAYE submission)
  • Construction Industry Scheme charges
  • In-year late filing penalties, which start from October 2014
  • In-year late payment penalties, which will be charged automatically from April 2015

HMRC may also charge interest on underpayments that arise because of adjustments reported on Earlier Year Updates submitted in respect of tax year 2014-15 onwards.

For annual payments such as Class 1A and Class 1B National Insurance Contributions (NICs), HMRC will continue to charge interest on any amount which remains unpaid after the due date.

 Will HMRC also pay interest on overpayments in-year?

Yes. HMRC will apply repayment interest where an employer makes a payment and the charge is then reduced, and this results in an overpayment which is:

  • reallocated to a later charge
  • repaid

 How will interest be calculated?

 HMRC will charge interest from the date a payment is due and payable to the date it is paid in full.

 For 2013-14 HMRC will charge interest on any amount outstanding for month 12 starting from 19/22 April 2014. Interest will only be charged on any month 12 late payment amounts and not all outstanding late payment amounts for 2013-14.

 For 2014-15 HMRC will charge in-year interest each month on any late payment, starting from 19 May 2014.

What has not changed since the Budget?

Monday, March 31st, 2014

  

  • Entrepreneurs’ Relief 

As long as the ownership of your business is structured correctly, and for a minimum time period, then lifetime disposals not exceeding £10m will only be taxed at 10% for Capital Gains Tax purposes.

 

  • Cap on tax reliefs 

Don’t forget that certain tax reliefs are capped at £50,000 or 25% of your income. The reliefs affected are predominantly tax losses. There is no cap on charitable donations.

 

  • Loss of personal allowance 

Care should be taken if your taxable income is likely to exceed £100,000 in the current tax year. For every £2 your income exceeds £100,000 your Personal Allowance (PA) will be reduced by £1. For 2014-15, this means that your PA will be withdrawn completely if your income exceeds £120,000.

 

  • Carry back charitable donations 

It is possible to carry back charitable donations made in the tax year 2014-15 to the previous year, 2013-14. The claim to carry back must be made before or at the same time as you complete your tax return for the earlier year. The latest date you can make a claim is the statutory filing deadline. For the 2013-14 return this is 31 October 2014 if you file a paper return, or 31 January 2015 if you file your return electronically.

 

  • Inheritance Tax (IHT) lifetime gifts

It is still possible to make lifetime gifts of any amount to an individual as long as there are no strings attached. The amount of the gift that will be included in your estate for IHT purposes may gradually reduce over time. If you live for more than seven years after the gift was made, then it will be excluded completely from IHT. If the gift becomes taxable on your death, then any tax payable on it is reduced if you survive it by at least 3 years.

 

These are just a few of the existing planning matters that you could or should consider. However, everyone’s circumstances are different and if your financial affairs are complex you should consider a formal tax planning consultation, which we would be delighted to undertake for you.

What has changed since the Budget?

Monday, March 31st, 2014
  • For those born after 5 April 1948 the personal tax allowance is £10,000. It was also announced that from 6 April 2015 this would increase to £10,500.
  • The much publicised change to the taxation of salaried members of Limited Liability Partnerships is confirmed. Ongoing vigilance is required to ensure that salaried members’ tax status does not change from self-employed to PAYE by default.
  • All partnerships will be affected by new rules that will allow HMRC, in certain circumstances, to reverse profit or loss sharing between partners if one or more of the partners is a “non-individual” – for example a limited company.
  • From April 2014 employers can claim the new £2,000 Employment Allowance that can be used to set off against their employers’ secondary National Insurance Contributions.
  • From 27 March 2014 and ongoing throughout the 2014-15 tax year, a number of relaxations are being introduced to make the withdrawal of benefits from pension funds more flexible. Any person who is eligible to draw from their pension funds should now take advice as a matter of urgency to determine their best course of action.
  • The Annual Investment Allowance is increased from 6 April 2014 (1 April if a company) to £500,000 (previously £250,000). The new ceiling will apply until 31 December 2015 when the limit could reduce to £25,000. Careful planning is required as, clearly, this measure is intended to encourage businesses to bring forward capital investment during this generous tax relief window. Again planning is required as transitional measures may reduce your entitlement to relief if your business year end date straddles the 6 April 2014 (1 April if a company).
  • Loans provided by an employer to an employee, that are interest free or low cost, did not generate taxable benefits if they were below £5,000. From April 2014 this limit is increased to £10,000.
  • Child care support is increased to 20% of costs capped at a maximum total cost per child of £10,000. All age groups will be brought into this scheme by autumn 2015.
  • From 6 April 2014 the Private Residence Relief final period exemption for Capital Gains Tax purposes is reduced to 18 months, previously it was three years.

Daily Telegraph puts Anti Avoidance Hysteria into Context

Friday, March 28th, 2014

I attach a link to this Daily Telegraph article, I can only hope that this is the start of more balanced reporting on this subject.

http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/digital-media/10727407/HMRCs-zeal-over-tax-avoidance-is-harming-investment-in-British-film.html

Investing in plant and equipment?

Thursday, March 27th, 2014

If expenditure on plant and equipment qualifies for the Annual Investment Allowance (AIA) 100% of the cost can be written off against taxable profits.

The amount that can be written off as AIA expenditure has changed a number of times in the past few years.

  • Immediately before 31 December 2012 the (AIA) was set at a maximum spend of £25,000.
  • From 1 January 2013 the £25,000 limit was increased to £250,000 for a temporary period of two years to 31 December 2914.
  • The Budget 2014 has increased the limit again, to £500,000 from 6 April 2014 (for unincorporated businesses) and 1 April 2014 (for companies). This further, temporary increase will end 31 December 2015 when it is assumed the limit will return to £25,000.

According to the Office for Budget Responsibility the increase to £500,000 will bring forward business investment decisions amounting to £1bn, from 2016 and 2017 to 2014 and 2015.

Readers who are contemplating significant business investment in plant and machinery should seek tax advice before making any buy decisions. Depending on your accounts year end date, the amount of tax relief you may qualify for may be reduced if the date straddles the 1st or 6th April 2014.

Risk-led tax enquiries

Wednesday, March 26th, 2014

HMRC has the right to investigate any tax return submitted by any taxpayer. The department has considerable powers to inspect documents and to question the taxpayer.

HMRC does not need a reason for an investigation. It selects some returns at random so an investigation does not necessarily mean that you are suspected of doing anything wrong.

The procedures for tax investigations are formal and subject to a code of conduct. They can often arise from a ‘discovery’. This includes situations where HMRC has discovered information not properly entered on your tax return. A discovery can extend the period allowed to HMRC to investigate.

If you are contacted by HMRC about a tax return, you should contact us to ensure that the matter is dealt with properly.

Avoiding an investigation

As some investigations are conducted at random, you can never completely escape the possibility of an inspection. However, most investigations, particularly the more detailed ones, arise because HMRC has concerns about a tax return.

The following steps should help avoid an unnecessary enquiry:

Make sure your returns are correct

Ensure that the arithmetic is correct, that the amounts relate to the right year and that all figures have been put in the appropriate box. If sending a paper return, make sure you have signed it.

Keep copies

Keep a copy of the return with working papers to say how every figure on the return has been taken from your records.

Retain documents

Maintain your copy of the return, the working papers and the supporting accounts and documents for at least six years.

Record queries

If you have raised a query with HMRC, keep a note of it with your tax papers. If the query was made by telephone, record the name of the tax officer, their department, the date and time and a note of what was said.

Check your figures

Compare the figures for turnover and profit with the previous year and with comparable trades. If there is a significant difference, ensure that you know why.

Contemplate full disclosure

Consider if any disclosure needs to be made in the ‘white space’ on a tax return. This is where you may disclose any other information. If you make a full disclosure in this space, it can restrict the right of HMRC to investigate, as HMRC cannot ‘discover’ what you have already told them.

Check your bases

Check the bases you use for determining the tax treatment. Do not assume that a basis is correct just because you have used it for many years without HMRC querying it.

Disclose mistakes immediately

This is likely to shorten any investigation and reduce any penalties that may be imposed.

What happens in an investigation?

You should contact us immediately if you receive an enquiry letter from HMRC. If it is a routine enquiry, we can ensure that any questions are answered promptly and fully.

HMRC can impose penalties for mistakes. The size of these penalties depends on:

  • whether the mistake was careless or reckless
  • whether it was concealed or voluntarily disclosed
  • how much you cooperate with HMRC.

The tax payable plus interest and penalties can be a large figure. We may not be able to avoid penalties but we can ensure that the penalty is minimised as much as possible.

We can also ensure that HMRC does not demand to see papers that are protected by legal privilege. HMRC is not entitled to go on a ‘fishing expedition’ to see if it can find evidence of underpaid tax. There have been cases where taxpayers have successfully challenged HMRC’s demands for documents.

Conduct of an enquiry

HMRC will, generally, carry out enquiries where one of three things is suspected:
            • fraud

            • fraud and avoidance

            • serious fraud.

HMRC will tell you if they suspect fraud. If they do, they usually do not tell you what is suspected or what evidence they have for their suspicion. Instead you are invited to make a disclosure of any irregularities you are aware of. It is a final opportunity to ‘come clean’. Where HMRC suspects fraud, it is essential that you obtain professional advice.

Tax evasion is a criminal offence for which offenders can be imprisoned and get a criminal record. HMRC often prefers to use a procedure known as ‘civil investigation of fraud’. Under this, a taxpayer who cooperates may be fully able to avoid criminal action.

How to survive an investigation

The following should help you when being investigated:

Be calm, polite and co-operative

A taxpayer who is agitated, impolite or uncooperative could be seen as having something to hide. Such behaviour undermines the credibility of evidence. Politeness makes it more likely that HMRC will listen sympathetically to what you have to say. Cooperation can reduce the amount of any penalty, sometimes to zero.

Be honest and complete in disclosures

If you are open in admitting your mistakes, you make it more likely that your other comments will be believed. One of the worst things to do is to make a partial admission while holding something back.

HMRC may have information about you that it has not disclosed, such as other shareholdings or properties.

Get your facts straight

Do not change your story or be vague. For example, if money has been paid to a director, be clear whether this is salary, dividend, loan, loan repayment, rent, expenses or something else. Ensure that your records support this.

If a document is missing, recreate the original, stating that it is re-created, and include as much detail as can be provided.

Remember that verbal evidence is still evidence. Normally your accountant will speak for you but ensure that you have someone who has a good command of the facts. It is helpful to produce a timeline of what happened and when. You should know why all decisions were made. Have your documents ready in an indexed bundle.

Tax Investigation Service

Tax investigations can be expensive, even if you are cleared or are subject to a random inspection. In addition to your own time and the disruption to your business, there can be accountants’ fees, which can become significant. Clients of McCleary & Company Ltd are generally covered by an insurance policy, paid by the firm, that ensures that our fees will be paid by the Insurance Company and not the client.  Another advantage of this service, is that HMRC cannot bully the client into a settlement, as we make them aware that the client is not incurring any fees in defending the case and can therefore afford to defend their position fully.  

Please let us know if you would like to discuss any aspect of tax investigations.

R&D and patents

Tuesday, March 25th, 2014

Research and development (R&D) and patent expenditure are treated generously for tax purposes.

The main provisions are:

                • R&D relief

                • capital allowance for R&D

                • expenditure on patents and know-how

                • the patent box.

What is R&D?
For accounting purposes, R&D is largely defined as expenditure that cannot qualify for tax relief unless it can first be accounted for as R&D against certain standards. Although this is the primary starting point, expenditure qualifying as R&D under UK GAAP does not automatically qualify for R&D tax relief as there is a wide range of tax guidance and legislation which must be satisfied.

R&D includes expenditure to:

• gain new knowledge

• extend such knowledge

• apply such knowledge to commercial applications.

Care is needed in determining what to include in the scope and whether it should be treated as capital or revenue. Tax relief may be claimable where the R&D is conducted by another company on your behalf.

R&D relief

Additional relief is available for certain R&D expenditure. This relief is sometimes called a ‘super-deduction’ as the amount allowed exceeds the actual expenditure. This relief may be claimed by a company of any size, provided it is carrying on a trade or intends to carry on a relevant trade after incurring the expenditure. The R&D must be relevant to the trade.

The treatment depends on whether a company is defined as ‘large’ or ‘small or medium-sized’ (SME). Large companies may claim tax relief amounting to an additional 30 per cent of qualifying expenditure incurred. SMEs may claim an additional 125 per cent. Thus R&D expenditure may be worth deductions of 130 per cent and 225 per cent respectively.

 

A SME may claim the additional relief against profits. Alternatively, in loss-making circumstances it may be able to surrender some or the entire claim for a cash payment known as the R&D tax credit. The applicable the rate is 11 per cent (14.5% from 1 April 214). This means that a company with a £100,000 claim can either:
                                • offset it against profits taxed at 20 per cent – saving £20,000 tax

                                • claim R&D credit of 11 per cent – a cash payment of £11,000.

In practice, the company usually claims the cash payment only when it has yet to make a profit.

Until 31 March 2016, a large company can choose whether to claim the additional relief as a super-deduction (as above), or claim above-the-line credit. From 1 April 2016, only the latter is available.

Above-the-line credit is given as 10 per cent of the expenditure. It increases the reported profits, making the tax benefit more obvious in the accounts.

The latter system can be more generous as the following example shows:

A company spends £5 million on a R&D project, of which £3 million is eligible for R&D relief. The project generates £7.2 million income. The main rate of corporation tax is 23 per cent.

                                                                                                Super-deduction                             Above-the-line

                                                                                                £’000                                                     £’000

Turnover                                                                             7,200                                                     7,200

R&D expenditure                                                         (3,000)                                                  (3,000)

Above-the-line credit    (at 10 per cent)               –                                                           300

Other expenditure                                                      (2,000)                                                (2,000)

Profit                                                                                   2,200                                                  2,500

R&D tax credit (at 30 per cent)                                 (900)                                                    –    .

Taxable profit                                                                   1,300                                                     2,500

Tax at 23 per cent of profit                                           299                                                      575

Above-the-line credit                                                    –     .                                                        (300)

Tax less credit                                                                   299                                                         275

 

 

We can make sure that you claim the maximum amount of allowable R&D relief.

R&D capital allowances

All allowable expenditure qualifies for a first year allowance of 100 per cent. Thus the whole of the expenditure may be deducted from taxable profits in the year the expenditure is incurred. This allowance is in addition to capital allowances for plant and machinery.

Costs of patents and know-how

A company may acquire a patent or pay for a licence to use a patent. For tax purposes, these are treated similarly. The cost of obtaining your own patent is not included within the scope of the R&D regime referred to above, but will usually qualify for tax relief under other tax provisions.

Similarly, a company may pay to acquire know-how. Know-how includes industrial information and techniques used in manufacturing, mining or agriculture but excludes commercial information such as client lists. It can include information about marketing, packaging and distribution.

Such expenditure is regarded as intellectual property. This expenditure can be written off over several years. In general, the tax treatment follows the accounting treatment.

We can advise you on how to show such expenditure in your accounts and tax returns.

Patent box

The patent box is a new regime which allows companies to pay less tax on income derived from patents (and from similar botanical and medical innovations). Use of the patent box is voluntary.

The patent box regime is being phased in over four years starting from 1 April 2013. When fully introduced, the regime will impose an effective corporation tax rate of 10 per cent on the relevant income. The company calculates its taxable profit in the usual manner and then subtracts a figure. The legislation allows the 10 per cent rate to be changed.

There are strict rules to ensure that only qualifying income is subject to the regime. In particular, the rules are designed to exclude:

                • income the company would have earned if it had not held the patent (or equivalent)

                • value attributable to the brand rather than the patent.

 

The scope of income subject to the regime is wide. It may include:

                • licensing or sale of the patent rights

                • sales of the patented invention

                • sales of products that include the patented invention

                • use of the invention in the company’s trade

                • proceeds or compensation for patent infringement.

The patent box is intended primarily for patents registered with the UK Intellectual Property Office or the European Patent Office. However, the scope is wide enough to include other forms of intellectual property such as plant variety rights and supplementary protection certificates. It also includes inventions for which a patent would have been issued but for national security considerations. It is also possible to claim if a company holds licences to use third party technology, although in practice this option is limited.

Income extends to parts intended for a product incorporating a patent even though the part itself is not patented. An example provided by HMRC is a bespoke but non-patented ink cartridge for a computer printer that is subject to a patent.

The calculation of relevant intellectual property profits then involves seven steps set out in tax law. There is an alternative small claims election that may be made for companies whose profits are small. There is also another alternative approach known as streaming and, in some circumstances, this can be mandatory.

The above is a very brief summary of a complex regime. It is intended merely to help you consider whether you may be entitled to benefit from these reliefs.

Please contact us to discuss the reliefs you are entitled to.

 

R&D and patents

Tuesday, March 25th, 2014

Research and development (R&D) and patent expenditure are treated generously for tax purposes.

The main provisions are:

                • R&D relief

                • capital allowance for R&D

                • expenditure on patents and know-how

                • the patent box.

What is R&D?
For accounting purposes, R&D is largely defined as expenditure that cannot qualify for tax relief unless it can first be accounted for as R&D against certain standards. Although this is the primary starting point, expenditure qualifying as R&D under UK GAAP does not automatically qualify for R&D tax relief as there is a wide range of tax guidance and legislation which must be satisfied.

R&D includes expenditure to:

• gain new knowledge

• extend such knowledge

• apply such knowledge to commercial applications.

Care is needed in determining what to include in the scope and whether it should be treated as capital or revenue. Tax relief may be claimable where the R&D is conducted by another company on your behalf.

R&D relief

Additional relief is available for certain R&D expenditure. This relief is sometimes called a ‘super-deduction’ as the amount allowed exceeds the actual expenditure. This relief may be claimed by a company of any size, provided it is carrying on a trade or intends to carry on a relevant trade after incurring the expenditure. The R&D must be relevant to the trade.

The treatment depends on whether a company is defined as ‘large’ or ‘small or medium-sized’ (SME). Large companies may claim tax relief amounting to an additional 30 per cent of qualifying expenditure incurred. SMEs may claim an additional 125 per cent. Thus R&D expenditure may be worth deductions of 130 per cent and 225 per cent respectively.

 

A SME may claim the additional relief against profits. Alternatively, in loss-making circumstances it may be able to surrender some or the entire claim for a cash payment known as the R&D tax credit. The applicable the rate is 11 per cent (14.5% from 1 April 214). This means that a company with a £100,000 claim can either:
                                • offset it against profits taxed at 20 per cent – saving £20,000 tax

                                • claim R&D credit of 11 per cent – a cash payment of £11,000.

In practice, the company usually claims the cash payment only when it has yet to make a profit.

Until 31 March 2016, a large company can choose whether to claim the additional relief as a super-deduction (as above), or claim above-the-line credit. From 1 April 2016, only the latter is available.

Above-the-line credit is given as 10 per cent of the expenditure. It increases the reported profits, making the tax benefit more obvious in the accounts.

The latter system can be more generous as the following example shows:

A company spends £5 million on a R&D project, of which £3 million is eligible for R&D relief. The project generates £7.2 million income. The main rate of corporation tax is 23 per cent.

                                                                                                Super-deduction                             Above-the-line

                                                                                                £’000                                                     £’000

Turnover                                                                             7,200                                                     7,200

R&D expenditure                                                         (3,000)                                                  (3,000)

Above-the-line credit    (at 10 per cent)               –                                                           300

Other expenditure                                                      (2,000)                                                (2,000)

Profit                                                                                   2,200                                                  2,500

R&D tax credit (at 30 per cent)                                 (900)                                                    –    .

Taxable profit                                                                   1,300                                                     2,500

Tax at 23 per cent of profit                                           299                                                      575

Above-the-line credit                                                    –     .                                                        (300)

Tax less credit                                                                   299                                                         275

 

 

We can make sure that you claim the maximum amount of allowable R&D relief.

R&D capital allowances

All allowable expenditure qualifies for a first year allowance of 100 per cent. Thus the whole of the expenditure may be deducted from taxable profits in the year the expenditure is incurred. This allowance is in addition to capital allowances for plant and machinery.

Costs of patents and know-how

A company may acquire a patent or pay for a licence to use a patent. For tax purposes, these are treated similarly. The cost of obtaining your own patent is not included within the scope of the R&D regime referred to above, but will usually qualify for tax relief under other tax provisions.

Similarly, a company may pay to acquire know-how. Know-how includes industrial information and techniques used in manufacturing, mining or agriculture but excludes commercial information such as client lists. It can include information about marketing, packaging and distribution.

Such expenditure is regarded as intellectual property. This expenditure can be written off over several years. In general, the tax treatment follows the accounting treatment.

We can advise you on how to show such expenditure in your accounts and tax returns.

Patent box

The patent box is a new regime which allows companies to pay less tax on income derived from patents (and from similar botanical and medical innovations). Use of the patent box is voluntary.

The patent box regime is being phased in over four years starting from 1 April 2013. When fully introduced, the regime will impose an effective corporation tax rate of 10 per cent on the relevant income. The company calculates its taxable profit in the usual manner and then subtracts a figure. The legislation allows the 10 per cent rate to be changed.

There are strict rules to ensure that only qualifying income is subject to the regime. In particular, the rules are designed to exclude:

                • income the company would have earned if it had not held the patent (or equivalent)

                • value attributable to the brand rather than the patent.

 

The scope of income subject to the regime is wide. It may include:

                • licensing or sale of the patent rights

                • sales of the patented invention

                • sales of products that include the patented invention

                • use of the invention in the company’s trade

                • proceeds or compensation for patent infringement.

The patent box is intended primarily for patents registered with the UK Intellectual Property Office or the European Patent Office. However, the scope is wide enough to include other forms of intellectual property such as plant variety rights and supplementary protection certificates. It also includes inventions for which a patent would have been issued but for national security considerations. It is also possible to claim if a company holds licences to use third party technology, although in practice this option is limited.

Income extends to parts intended for a product incorporating a patent even though the part itself is not patented. An example provided by HMRC is a bespoke but non-patented ink cartridge for a computer printer that is subject to a patent.

The calculation of relevant intellectual property profits then involves seven steps set out in tax law. There is an alternative small claims election that may be made for companies whose profits are small. There is also another alternative approach known as streaming and, in some circumstances, this can be mandatory.

The above is a very brief summary of a complex regime. It is intended merely to help you consider whether you may be entitled to benefit from these reliefs.

Please contact us to discuss the reliefs you are entitled to.

 

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