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Making tax digital

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Making tax digital

  1. 1. 100% Cloud – Your Action Plan for Success 4 © 2020 Innovation Training Limited 2017 QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide Authored by Rebecca Benneyworth Rebecca Benneyworth Training QuickBooks Connect London 6–7March 2017
  2. 2. Copyright Copyright 2017 Intuit Ltd. All rights reserved. Trademarks © 2017 Intuit, Inc. All rights reserved. Intuit, the Intuit logo, Intuit ProLine, Lacerte, ProAdvisor, ProSeries and QuickBooks, among others, are trademarks or registered trademarks of Intuit, Inc. in the United States and other countries. Other parties’ marks are the property of their respective owners. Notice to Readers The publications distributed by Intuit, Inc. are intended to assist accounting professionals in their practices by providing current and accurate information. However, no assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a client’s particular situation. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit, Inc. does not render any accounting, legal or other professional advice, nor does it have any responsibility for updating or revising any information presented herein. Intuit, Inc. cannot warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. Readers should verify statements before relying on them.
  3. 3. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 1 Table of Contents About Your Presenter..............................................................................................................2 Introduction ............................................................................................................................3 Bringing Business Tax into the Digital Age.............................................................................5 Content ........................................................................................................................................................ 5 Overview...................................................................................................................................................... 5 Details: Who? .............................................................................................................................................. 5 Details: When? ............................................................................................................................................ 6 Details: What? ............................................................................................................................................. 7 Details: How?............................................................................................................................................... 8 Simplifying Tax for Unincorporated Businesses .................................................................. 10 Increase in Limit for Cash Accounting for Traders ...............................................................................10 The Reform of Basis Periods....................................................................................................................11 Simpler Business Reporting ....................................................................................................................11 Reforming the Capital / Revenue Divide in the Cash Basis.................................................................11 Cash Basis for Unincorporated Property Businesses ........................................................... 12 Detailed Proposals ...................................................................................................................................12 Consultation Response ............................................................................................................................13 Voluntary Pay as you Go ...................................................................................................... 14 Consultation issues...................................................................................................................................14 Consultation Response ............................................................................................................................14 Tax Administration............................................................................................................... 15 Consultation Details .................................................................................................................................15 Consultation Responses ..........................................................................................................................16 Transforming the Tax System through Better Use of Third Party Information .................... 17 Overview....................................................................................................................................................17 Responses..................................................................................................................................................17
  4. 4. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 2 About Your Presenter Rebecca is a lecturer, writer and consultant on a wide variety of taxes. Former Chair of the ICAEW Tax Faculty, she lectures extensively to accountants and business people and also to HMRC and the Treasury. Rebecca is well known for her down-to-earth approach to tax and her ability to make the subject matter both clear and interesting. She also has an interest in all issues affecting smaller practices and has her own small accountancy practice based in Gloucestershire. Rebecca Benneyworth Owner Rebecca Benneyworth Training
  5. 5. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 3 Introduction Making Tax Digital is heralded by the Government as both offering significant administrative savings to businesses and in addition considerable additional tax take for the exchequer – the latter claim based mainly on the reduction of errors but also the opportunity for HMRC to police the tax system more effectively. For the external consumer of the tax system — businesses, individual taxpayers (including those outside self-assessment) — it offers the digital tax account as a panacea to many who need or wish to deal with their tax affairs in a timely manner. Businesses will be contacted through their tax account by HMRC with news about changes affecting their sector or geographical area. For example, a florist in Lincolnshire might hear about changes affecting his trade sector, or special arrangements for taxpayers affected by floods in Lincolnshire. Through this personalised direct contact HMRC hopes to support taxpayers to get it right first time by suggesting online training and other help when the taxpayer may have made a mistake with his accounts, as revealed by the new system of quarterly updating. This utopian vision will cost in the order of £1.3 billion to deliver over the next four years. Behind the scenes, it is the chance for HMRC to design and build back end systems and processes to replace the outdated hardware and processes built for each separate tax (known as a Heads of Duty) in the days when computers were an aid to manual systems rather than the system itself. The new process will have a unique “customer record” for every taxpayer (including large corporations, which join the new system later than small businesses) and all of the tax affairs of that taxpayer will be presented in a single view — an idea first floated around a decade ago. But behind all of the ambitious and exciting plans stands the elephant in the room. The proposals depend on the mandation of digital record keeping by businesses. This is the first time any tax authority in the world has sought to dictate the way in which tax records are kept. HMRC is adamant that moving to digital record keeping will save money for businesses, and explains that mandation is necessary in order to produce the tax savings anticipated in the business case made for the expenditure. HMRC released six consultation documents on 15 August 2016: • Bringing business tax into the digital age • Simplifying tax for unincorporated businesses • Simplified cash basis for unincorporated property businesses • Voluntary pay as you go • Tax administration • Transforming the tax system through better use of third party information
  6. 6. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 4 On 31 January 2017, HMRC published the Government’s response to the consultation responses, plus some draft primary legislation. However, a number of key issues remain undecided. The remainder of these notes deal with each consultation area. Whilst there is a huge amount of change for tax agents and advisers to get to grips with, Making Tax Digital will bring undoubted opportunities for professional firms to re-engineer their services and continue to provide valuable support and advice to their clients.
  7. 7. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 5 Bringing Business Tax into the Digital Age CONTENT This consultation is the focus of the changes proposed for businesses in terms of record keeping and regular updates to HMRC. It also covers commencement dates, exemptions and the issue of prompts and nudges. OVERVIEW • Businesses which are not exempt from the requirements will be required to keep digital records. • Businesses will be required to update HMRC at least quarterly with details of their transactions, using MTD compatible software. • Annual accounts must normally be finalised within 10 months after the end of the accounting period. • The digital tax account will show the estimated tax liability based on the submissions made so far in the tax year; taxpayers will be able to choose to pay their tax based on the submissions made. • Prompts and nudges will be included in MTD compatible software, which will encourage and support taxpayers to file updates on time, and gradually help to eliminate errors in accounting records. DETAILS: WHO? All income tax businesses and landlords will be affected by the new rules unless they are exempt. There are a number of exemptions confirmed in the January response document, but the most important exemptions have not yet been finalised. • Charities will be exempt from the requirements completely • Similarly, Community Amateur Sports Clubs will be exempt from all of the requirements • There may be other exempt categories of business, which is likely to include some types of unit trust. Trading subsidiaries of charities will not be exempt. It is likely that there will be some form of exemption for insolvent businesses. • There will be an exemption for businesses “unable to engage digitally”. This will cover the existing exemption from filing VAT returns online, as follows: l a person who is a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications; and persons for whom MTDfB is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason.
  8. 8. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 6 • There will also be an exemption for very small businesses, based on turnover. The consultation documents proposed that this should be £10,000 for both traders and landlords (although gross rents and turnover would be added together for taxpayers with both sources of income). The Government proposals on this subject are still awaited, and likely to be announced in the March Budget. Most commentators have recommended a limit of £83,000 — equal to the VAT registration threshold. • Partnerships and landlords (and trusts which have rental or trading activities) are subject to the rules, but very large partnerships will have more time to comply, as HMRC believes that there are complexities which need to be resolved. DETAILS: WHEN? The Government response to the consultation document provides almost all of the detail we need to know under this heading. • Businesses and landlords will be brought within the MTD rules from the start of the first accounting period after 5 April 2018. This means that if a business has an accounting date of 30 April, it will come within MTD from 1 May 2018. All landlords will come within MTD from 6 April 2018, as their accounting period aligns with the tax year. • Some smaller businesses will be given more time to comply with MTD. This proposal was included within the consultation documents, but with no suggestion as to the level of turnover that might apply, or the period of delay. Many commentators have recommended that if the initial exemption limit is set at £83,000 then smaller businesses (unspecified) should not commenced MTD until the IT systems are established and proven. We hope to hear more of this at the March 2017 Budget. • Those businesses which are VAT registered, and therefore have to file VAT returns will be required to bring their VAT returns within the MTD process from April 2019. This does suggest that the web-based VAT return process will be withdrawn from 2019. • Limited companies will not come into MTD until April 2020. This is because there will be a number of complex issues to resolve for very large companies and groups, so more time is being allowed for MTD to develop, bed in and then build these more complex solutions. • The response indicated that very large partnerships would also have much more time to come within MTD. No final date has been announced yet, but it is likely that, given the complexity of some of the issues, these will be delayed until 2020.
  9. 9. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 7 DETAILS: WHAT? This section describes exactly what those affected will be required to do to meet the MTD rules. • Keep digital records. This will mean either using MTD approved accounting software or spreadsheets accompanies by software which together meet the requirements of MTD. HMRC expects business to keep their records as near to real time as possible, but the requirement for quarterly updates means that this will be at a minimum quarterly. The exact content of the digital records will be determined by secondary legislation but is likely to include enough information to identify the receipts relating to expenditure or the sales invoice for income. It is likely that retailers will be permitted to include their daily till totals rather than individual transactions. • Analyse their transactions in accordance with the categories on the current Self- Assessment return, viz: l Turnover l Other business income l Cost of goods bought for resale or goods used l Construction industry – payments to subcontractors l Wages, salaries and other staff costs l Car, van and travel expenses l Rent, rates, power and insurance costs l Repairs and renewals of property and equipment l Phone, fax, stationery and other office costs l Advertising and business entertainment costs l Interest on bank and other loans l Bank, credit card and other financial charges l Irrecoverable debts written off l Accountancy, legal and other professional fees l Depreciation and loss/profit on sale of assets l Other business expenses It is acceptable to use more categories than those listed above, but these are the minimum categories, even for those businesses permitted to file a three line summary. • Landlords will keep their records in line with the current tax return entries, viz l Income, analysed between rents, premiums and reverse premiums l Rates, insurance, rent and ground rent l Property repairs and maintenance l Loan interest and other financial costs l Legal, management and other professional fees l Costs of services provided, including wages l Other allowable property expenses
  10. 10. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 8 • Submit updates of totals of transactions to HMRC at least once every three months. For businesses with turnover below the VAT limit (currently £83,000) this may be submitted as total income, total expenses and net profit. This does not obviate the need to keep records with more detail, as described above. Larger businesses will submit the analysis shown above. • Finalise their profits for the accounting period at the earlier of: l Ten months after the end of the accounting period, or l 31 January following the year of charge for the profits So, for a business with an accounting date of 30 April, the date for finalising the accounting adjustments is 28/29 February. For an accounting date of 30 September, the date is 31 July, and for 31 March it will be 31 January. • When VAT comes into MTD — from April 2019, VAT registered businesses will initially be required to submit only the content on the current VAT return — that is boxes 1 to 9, through quarterly updates. Where businesses operate VAT schemes such as partial exemption these calculations will be permitted to fall outside the MTD software until time has allowed for software providers to develop more sophisticated software to meet the needs of those businesses. • Partnerships will submit updates (and keep records) on a whole firm basis, but updates will be required to identify the share applicable to each partner. DETAILS: HOW? This section considers how the requirements of Making Tax Digital can be met by businesses and landlords. • It is a given that businesses and landlords will have to obtain some software in order to meet the requirements of MTD. However, even that aspect of the new rules includes some complexity. This is not helped by not being able to see MTD software in action — there are currently no products available which meet the requirements of MTD. • Businesses with simple tax affairs will be provided with free software. The response document indicates that this will cover businesses with no employees, trading below the VAT limit. HMRC expects several third party software providers to release free software. Free software will be required to meet all of the requirements of MTD. • If a business currently keeps records on spreadsheets, these will not meet the requirements of MTD alone. The business will need to use spreadsheets in conjunction with other software in order to meet the full requirements of MTD. The exact specification of the “other software” and what it must do will be within the remit of the Software Developers Support Team (SDST). • Over time, HMRC expects software to become more sophisticated and include API’s (Application Program Interfaces) supplied by HMRC based on risk analysis and error detection. It is the use of these API’s which HMRC believes will drive down error and produce the tax gap yield which is, in part, driving this project. HMRC’s risk team is developing prompts and nudges with the help of experienced accountants which will then be handed to the software teams to build the API’s.
  11. 11. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 9 • Business will not be required to keep digital copies of their receipts, but some of the apps being developed are based on a photograph of the receipt which is then digitised and recorded within the software. So, in theory all the business owner has to do is photograph the receipt with his smart phone and both the receipt and the transaction are recorded accurately. However, although there are several software products which can do this, their success rate falls short of 100%, so errors may still be introduced into the records. Further, although the advertising material for such products indicates that the original copy of the receipt can be “thrown away” this would be very risky in practice in case the digital records are compromised. • There are no penalties for errors in quarterly submissions, and there is no requirement to include period end adjustments such as accruals and prepayments in the quarterly submissions, so advisers will need to consider how much they wish to be involved in the quarterly submissions. Will they provide a check service? Where clients already competently keep their own records and submit their own VAT returns there is probably little need for the adviser to become involved in the quarterly update process beyond checking that the chart of accounts meets the minimum requirements. • Where your firm currently provides bookkeeping services to clients (particularly in relation to quarterly VAT returns) it is likely that the provision of your services will barely be affected by the new regime. • Where your clients keep records on spreadsheets or manually (whether successfully or not) you will need to consider carefully what support they will need — and can pay for — to meet the requirements of MTD. For example, where clients accurately complete spreadsheets, will your firm invest in the intermediate software to submit their quarterly updates for them? To what extent will you check the records before submission? Clients keeping manual records will have to adopt some software. Will you be suggesting software, or allowing them a free choice. If they are entitled to use free software will you be prepared to support their choice of package? • If a client is VAT registered and his VAT periods do not align with his accounting year end, you should consider either adjusting the year end or the VAT quarters to align, otherwise he will be making extra submissions for VAT out of sync with the submissions for income tax.
  12. 12. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 10 Simplifying Tax for Unincorporated Businesses This consultation document considered various simplifications to make the whole process easier for unincorporated businesses and build on the simplified cash basis introduced in 2013. Four main ideas were advanced, each described in detail, with the proposed outcomes explained. INCREASE IN LIMIT FOR CASH ACCOUNTING FOR TRADERS It is anticipated that businesses may prefer to complete their accounts on a cash basis for the purposes of MTD, simplifying considerably the year end process. To this end it was suggested that the turnover entry level for the cash basis could be increased, allowing more take up. The response document indicates that the government has settled on a new limit of £150,000, with an exit threshold of £300,000, with the same limit applying to Universal credit claimants. The new limits will apply for the 2017/18 tax year. You may wish to consider whether you wish to move clients to the cash basis or whether you prefer to keep them on the accruals basis. There are some downsides to using the cash basis which should be borne in mind before making the final decision. • Losses are restricted to carry forward only — there is no sideways or carry back relief. This would affect new businesses particularly, • Finance costs are restricted to £500 per annum. This includes interest charges (including HP interest) and any other fees such as arrangement fees. • Where plant or other fixed assets (other than cars) are purchased outright, the cost must be deducted in full in the cash accounts. This excludes the option to tailor the capital allowances claim to preserve sufficient profit to cover the personal allowance. • Some businesses will find that cash accounting distorts their profits significantly by separating income and related expenditure across a year end. For example a person buying stock near their period end to sell in the following period will have significantly depressed profits followed by inflated profits in the next period.
  13. 13. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 11 THE REFORM OF BASIS PERIODS Proposals were advanced to change the basis period rules — in essence abolishing all of the special rules and allowing businesses to choose accounting periods of varying length almost without limit. The resulting accounting periods would be allocated to a tax year based on those ending within the fiscal year. Overlap profits would be a thing of the past, and no special rules would be needed. There was a wide variety of responses to this question, and a number of issues were raised which government considers need more detailed study, such as tax avoidance opportunities and the impact on partnerships. The issue will therefore be considered further before any changes are proposed. SIMPLER BUSINESS REPORTING This proposal considered changing the calculation of taxable profits for those not using the simplified cash basis by removing some accounting requirements, including accruals and prepayments, stock adjustments, revenue recognition of long-term contracts and bad debt provisions. The responses were very mixed to this proposal so government is giving this proposal more thought before making any further announcements. REFORMING THE CAPITAL / REVENUE DIVIDE IN THE CASH BASIS This proposal, which will go forward, will make the capital revenue divide clearer by specifying what is to be treated as capital within the cash basis for traders.
  14. 14. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 12 Cash Basis for Unincorporated Property Businesses The simplified cash basis introduced for small businesses in FA 2013 does not apply to landlords. Instead HMRC allows landlords with gross receipts not exceeding £15,000 to calculate their profits under a concessionary cash basis method discussed in PIM1101. Following the success of the FA 2013 legislation, this consultation document proposed introducing an optional simplified cash basis for landlords, potentially without a limit on gross rents. It suggested that this could apply to residential properties, commercial properties and furnished holiday lets (FHL) owned by unincorporated businesses. It may also be available to unincorporated non- resident landlords. DETAILED PROPOSALS Amendments to the FA 2013 simplified cash basis rules would: • Allow interest to qualify without the application of the £500 limit and the related mixed purpose interest rule. Interest would be allowed according to the existing rules for landlords, including the restriction of relief for interest in relation to residential properties starting in 2017/18 • Continue to allow deductions for the cost of replacing domestic items in residential properties under the rules introduced in Finance Act 2016 • Allow the unincorporated owners of furnished holiday lets, and presumably commercial properties although this is not mentioned, to retain capital allowances The consultation also considers the subject of tenant deposits. In strict terms the cash basis would regard these as income when received and expenditure when repaid, but the consultation offers the possibility of these being 'ring-fenced' until the end of each tenancy. In a wider context, the Bringing business tax into the digital age consultation document suggested that expenses need to be digitally recorded separately for each let property. Where a landlord has many properties and, for example, has a large number of gas inspections completed on a single day this is likely to present significant extra bookkeeping effort.
  15. 15. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 13 CONSULTATION RESPONSE Government has decided to introduce a cash basis for landlords from April 2017, with an upper limit on rental income of £150,000 (the same as the cash basis for traders). The new cash basis will be the default accounting method for qualifying landlords, but there is a free choice to opt out. Lease premiums would not be included in the cash basis. The cash basis will include receipts of rent when paid to an agent acting on the landlords’ behalf, rather than when money is transferred from the agent to the landlord. There will be no restriction on finance costs, other than those applying to the accruals basis and if an owner has more than one property business (such as UK and overseas property) he will be able to choose separately whether to use the cash basis on each of them. Joint owners of let property, other than spouses and civil partners, will be able to separately choose the cash basis or the accruals basis should they wish. For married couples and civil partners they must share the profits 50/50 or based on the actual proportion owned (if such an election has been made) so must use the same basis. The response to Bringing Business Tax into the Digital Age included confirmation that landlords will not be required to separate expenses on a property by property basis.
  16. 16. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 14 Voluntary Pay as You Go This consultation set out the options for taxpayers to make payments towards their eventual tax liability, aided by information on their digital tax account. This option is something HMRC has been asked for during research and is keen to provide, not least because it makes it more likely that tax liabilities will be met in full by the due date. However, Government has already stated that the rules governing statutory payment dates will not be changed before 2020. CONSULTATION ISSUES The consultation sought help in the layout and design of the display, and suggested some rules about these payments. This proposal also considered looking at all of a taxpayer’s liabilities together, such as income tax and national insurance contributions on profits, PAYE, capital gains tax (and VAT from April 2019. Although Self Assessment taxpayers who file online using the free HMRC software can already make regular payments to HMRC, this consultation went beyond this by allowing aggregation of tax liabilities and complete flexibility on the amount and date of the payment. There was also some detailed discussion about taxpayers seeking to claim back voluntary payments should they need to. CONSULTATION RESPONSE Input from respondents was welcomed, and some firm proposals about design were confirmed, but much rests on the design of the digital tax account and the messages for taxpayers about their voluntary payments which government will continue to consider. This is really a “watch this space” scenario, but as the option for PAYG is entirely a free choice, it need not be of concern to advisers at present.
  17. 17. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 15 Tax Administration The tax administration changes will be included in Finance Bill 2017, so some detail is set out for consultation. CONSULTATION DETAILS In principle powers (and safeguards) such as enquiry and other compliance powers, determinations, discovery assessments and corrections to 'returns' will be carried across into the new regime with only the necessary changes to articulate with the effective abolition of the tax return. Compliance powers will not be directed at quarterly updates, as the Government recognises that taxpayers may need to make corrections in the end of year declaration. For late submission and late payment sanctions some new proposals are advanced, based on a discussion paper on penalties issued in early 2015. Non-deliberate late submission penalties could move to a more flexible points based system, imposing a penalty when a certain level of points have been reached through multiple failures across all tax obligations. Two potential models are included in the consultation for comment. Deliberate late submission penalties may be tax-geared (as opposed to the initial flat £100 penalty which applies currently). Late payment sanctions could move to a penalty-interest model (in addition to the normal interest charge) which would escalate as the default lengthens. An alternative is to align all late payment penalties across both the direct and indirect tax regimes. Changes to the penalties for inaccuracies will be subject to a later consultation, but are expected to apply to the end of year declaration and VAT quarterly returns only.
  18. 18. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 16 CONSULTATION RESPONSES Generally, government has announced that the new powers will replicate the existing powers as far as possible. Key points to note: • All taxpayers will have 12 months without penalties before penalties for late submissions will be introduced. • There will be no compliance penalties for errors in quarterly updates. • The penalty process for late submissions will move to a points based penalty, but there will be a further consultation (probably at Budget 2017) before any progress with this is made. • Late payment will attract penalty interest, but the detailed proposals will once again be subject to a further consultation in Spring 2017. Once again, being ready to comment on any further developments is all that is needed here.
  19. 19. QuickBooks Connect London 2017 Making Tax Digital — A Technical Guide 17 Transforming the Tax System through Better Use of Third Party Information OVERVIEW This aspect of MTD is more about making tax digital for individuals (MTDfI) as it covers the income that individuals would otherwise report on their tax return. The benefits of these proposals are clear — no taxpayer would ever be required to tell HMRC about information already in the tax authority’s possession. So as early as April 2017 details of pay, pensions and benefits reported by employers and pension providers would be shown on the individual tax account. From April 2018 this would be supplemented by interest from banks and building societies. The interest from each account will be displayed separately. Beyond that, HMRC is considering additional powers to require information from third parties — the most obvious of which is dividends. Also mentioned is rent paid to landlords (presumably by letting agents). Much of the consultation is directed at third parties and the ease and frequency of providing information. Those who own assets jointly where a 50:50 split is not appropriate will be able to notify HMRC of the correct beneficial ownership via the digital tax account. The pre-populated details will be greyed out so that the taxpayer cannot alter it. If this pre- populated information is incorrect there are two routes to resolve this: • If he does not believe he has that source of income, the taxpayer can raise a query with HMRC via the digital tax account • If he agrees that he has this source of income but disagrees with the amount, he must contact the third party and if necessary the third party will then resubmit the amended information to HMRC Whichever route is appropriate, this could be very time consuming and could make finalising the year close to the deadline difficult. Those with more complicated affairs, for example those who hold funds in trust for others, may find themselves chasing their tails with the banks to get interest figures corrected. If the query remains unresolved by the deadline for filing the end of year declaration, HMRC will make an estimated assessment based on the existing figures. RESPONSES The response document largely confirms the proposals above, including query resolution.

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