What Is Employee Share Scheme?
- PTA
- Feb 3, 2023
- 18 min read
Updated: Jan 15, 2024
Employee Share Schemes (ESS) in the UK provide a mechanism for companies to offer shares to their employees, often with significant tax advantages. These schemes are designed to incentivize employees, align their interests with those of the company, and serve as a tool for attracting and retaining talent. The UK government has established various types of ESS, each with its own rules and tax implications.
Thus in an Employee Share Scheme (ESS) is a program in which employees of a company are given the opportunity to own a stake in the company through the acquisition of shares. In the UK, there are various types of ESS, including Share Option Schemes, Share Incentive Plans, and Enterprise Management Incentives. Share Option Schemes allow employees to purchase shares in the company at a discounted price. The options can either be granted at a fixed price or at a price that is based on the market value of the company's shares at the time of grant.
If your organization offers you corporation stocks, you could get tax blessings, like no longer paying Income Tax or National Insurance on their value. Employee share schemes can involve giving free shares to personnel, granting them options to buy stocks at a certain rate after a particular period of time, or allowing personnel to buy stocks, and every so often matching those with unfastened ones.
Employee Share Schemes in the UK: An In-Depth Overview
Types of Employee Share Schemes
Share Incentive Plans (SIPs): SIPs involve keeping shares in a trust for employees until they decide to withdraw them. These can include Free Shares, Partnership Shares, Matching Shares, and Dividend Shares.
Save As You Earn (SAYE): SAYE allows employees to save monthly and use these savings to buy shares at a discounted price. The plan usually lasts for 3 or 5 years.
Company Share Option Plans (CSOPs): CSOPs grant employees the option to buy shares at a future date at a set price. Recent changes have increased the share options limit from £30,000 to £60,000.
Enterprise Management Incentives (EMIs): EMIs are designed for smaller companies, allowing them to grant share options up to a certain limit without tax at the time of granting.
Employee Shareholder Shares: Employees receive shares in exchange for giving up certain employment rights, with specific tax advantages.
Tax Advantages and Considerations
Income Tax and National Insurance: Generally, employees do not pay Income Tax or National Insurance on the value of shares acquired through these schemes.
Capital Gains Tax (CGT): Employees might have to pay CGT when they sell their shares. However, there are allowances and reliefs available, such as Business Asset Disposal Relief for certain shareholdings.
Dividend Tax: Dividends received on these shares may count towards the employee’s annual dividend allowance.
Corporate Tax Relief: Companies can also benefit from corporate tax relief on the cost of setting up and administering these schemes.
Scheme Eligibility and Restrictions
Eligibility for these schemes can depend on factors like the size of the business, the nature of the shares, and the company's structure.
Certain schemes are designed specifically for employees, as opposed to consultants or advisors.
The process of setting up such schemes requires careful planning, valuation, and compliance with legal and tax
How Employee Share Scheme Works in the UK: A Step by Step Guide
Employee Share Schemes (ESS) in the UK offer a valuable means for companies to incentivize and retain their workforce by providing them with a stake in the business. Understanding how these schemes work is crucial for both employers and employees. This guide presents a step-by-step approach to understanding and implementing an ESS in the UK.
Step 1: Understanding Different Types of ESS
Before diving into ESS, it's important to recognize the various types available. The most common include Share Incentive Plans (SIPs), Save As You Earn (SAYE) schemes, Company Share Option Plans (CSOPs), and Enterprise Management Incentives (EMIs). Each type caters to different company sizes and employee needs, offering various tax advantages.
Step 2: Establishing Eligibility and Scheme Selection
The company must determine its eligibility for different ESS types. Factors like company size, the nature of shares, and employee roles play a significant role. Once eligibility is established, the company selects a scheme that aligns with its objectives, whether it’s to reward, retain, or provide ownership to its employees.
Step 3: Scheme Design and Legal Compliance
Designing the scheme involves deciding on the specifics, such as the number of shares, the vesting period, and the exercise price for options. Compliance with legal regulations, particularly the Income Tax Earnings and Pensions Act (ITEPA) 2003 and subsequent amendments, is crucial. This step may require legal consultation to ensure adherence to tax laws and employment regulations.
Step 4: HMRC Approval and Implementation
For certain schemes like EMIs, obtaining HMRC approval is necessary. The process involves submitting detailed information about the scheme and awaiting HMRC’s review and approval. Once approved, the company can formally implement the scheme, which includes internal setup, employee communication, and administration.
Step 5: Employee Participation
Informing and educating employees about the scheme is vital. Employees need to understand how the scheme works, its benefits, and any potential risks. This step may involve informational meetings, distributing literature, and providing channels for questions and feedback.
Step 6: Managing and Administering the Scheme
Effective management of the scheme is crucial for its success. This involves regular monitoring, providing updates to participants, and ensuring compliance with ongoing tax and legal requirements. Companies often use specialized software or external administrators for efficient management.
Step 7: Exercising Options and Selling Shares
For schemes involving options, employees will have the opportunity to exercise these options at predetermined points. This step involves deciding when and how to buy the shares and understanding the tax implications. Selling shares acquired through ESS might attract Capital Gains Tax, and employees should be informed about the tax considerations.
Step 8: Reporting and Compliance
Regular reporting to HMRC is a critical component of ESS management.
Employee Share Schemes in the UK: Implementation and Tax Implications
Implementing Employee Share Schemes
The process of implementing employee share schemes (ESS) in the UK requires careful planning and adherence to specific legal and tax regulations. The schemes vary in complexity, and the choice depends on various factors including company size, share types, and employee eligibility.
Setting the Framework: Establishing ESS involves creating a legal structure, which may require amendments to the company's Articles of Association, especially when creating new share classes for schemes like EMIs or jointly owned shares.
Legal and Tax Compliance: Employers must ensure compliance with the Income Tax Earnings and Pensions Act (ITEPA) 2003 and any recent amendments. For instance, recent changes to the Company Share Option Plans (CSOP) increased the share options limit from £30,000 to £60,000 and removed some restrictions on eligible shares.
Scheme Approval: Schemes like EMIs require HMRC approval, and companies must adhere to specific eligibility criteria.
Tax Advantages and Compliance
Income Tax and National Insurance: Tax advantages for ESS include exemptions from income tax and National Insurance on share values under certain conditions.
Capital Gains Tax (CGT): Changes in CGT rates and allowances, like the reduction from £12,300 to £6,000 in April 2023, impact the tax liabilities for employees when they sell shares acquired through ESS.
Dividend Tax: Dividends from shares in ESS count towards the annual dividend allowance, with specific rules for schemes like SIPs.
Corporate Tax Relief: Companies can claim tax relief for the costs of setting up and administering ESS.
Challenges and Opportunities
Flexibility vs. Tax Advantages: Tax-advantaged schemes offer significant benefits but often come with restrictions on participation and flexibility.
Scheme Accessibility: The government's focus on making SAYE and SIP schemes more accessible, especially for lower earners, highlights the need for more inclusive ESS.
Economic Impact: ESS are seen as tools for economic growth, improving employee motivation, and aligning employee and shareholder interests.
Feedback and Consultations: Ongoing consultations, like the call for evidence on SAYE and SIP schemes, provide opportunities for employers to suggest improvements and enhance scheme effectiveness.
How are Employee Share Schemes Taxed in the UK
Employee Share Schemes (ESS) in the UK offer various tax advantages both for employers and employees. However, the tax implications can be complex, depending on the type of scheme implemented. This guide provides an overview of the taxation aspects associated with different ESS in the UK.
Types of Employee Share Schemes and Their Taxation
Share Incentive Plans (SIPs):
Income Tax and National Insurance Contributions (NICs): No Income Tax or NICs are charged on shares bought with pre-tax salary (up to £1,800 or £3,600 in free shares).
Capital Gains Tax (CGT): No CGT is due if shares are sold directly from the plan. However, if shares are transferred out of the plan and then sold, CGT might be applicable.
Save As You Earn (SAYE):
Income Tax and NICs: Contributions are made from post-tax salary, hence no Income Tax or NICs are applicable.
CGT: If the shares are sold, CGT may be due on any gain. The gain is the difference between the amount paid for the shares and their value at sale.
Company Share Option Plans (CSOPs):
Income Tax and NICs: There is no Income Tax or NICs on the grant of the option nor on its exercise, provided the exercise price was at least equal to the share's market value when the option was granted.
CGT: On selling the shares, CGT may be due on the growth in value since the option was exercised.
Enterprise Management Incentives (EMIs):
Income Tax and NICs: No Income Tax or NICs on the grant of EMI options, and potentially none on exercise if the exercise price is at least equal to the market value at the date of grant.
CGT: Favorable CGT treatment, including eligibility for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, which can reduce the CGT rate.
Taxation at Different Stages of ESS
At Granting of Shares/Options: Typically, there is no tax charge when shares or options are granted to employees under most tax-advantaged schemes.
At Vesting/Exercise: The point at which options are exercised (converted into shares) can trigger a tax event. For tax-advantaged schemes like EMIs and CSOPs, there’s usually no tax due if the exercise price was at least the market value at the grant date.
On Disposal of Shares: When employees eventually sell their shares, CGT may be applicable. The taxable gain is generally the difference between the sale proceeds and the market value of the shares when they were bought or when options were exercised.
Employee share schemes in the UK present a valuable opportunity for companies to incentivize and align their workforce with corporate goals. However, navigating the legal and tax complexities requires careful planning and awareness of ongoing regulatory changes. Employers must balance the tax advantages with the need for flexibility and inclusivity in their ESS.
What are the Benefits of Employee Share Schemes
Employee Share Schemes (ESS) in the UK offer a range of benefits for both employers and employees. These schemes are a popular means of aligning the interests of employees with those of the company and can lead to increased productivity, employee retention, and shared success. Here are some key benefits:
Employee Motivation and Engagement: By owning a stake in the company, employees are likely to feel more invested in the business's success. This sense of ownership can boost motivation, productivity, and loyalty.
Attracting and Retaining Talent: Offering shares or share options can make a compensation package more attractive. It's an effective tool for attracting high-caliber candidates and retaining key staff, as employees are more likely to stay with a company where they have a vested financial interest.
Alignment of Interests: ESS aligns employees' interests with those of shareholders. Employees who are shareholders are more likely to think and act like owners, focusing on long-term success and profitability.
Tax Efficiency: Various ESS, like SIPs, SAYE, CSOPs, and EMIs, offer tax advantages. These can include no Income Tax or National Insurance Contributions on the value of shares or options at the time they are granted or purchased, and potentially favorable Capital Gains Tax treatment when shares are sold.
Improved Company Performance: Studies have shown that companies with employee share ownership often perform better than those without. This improved performance can be attributed to increased employee commitment and a greater sense of responsibility towards the company's success.
Financial Rewards for Employees: ESS provides a potential for financial gain to employees through the appreciation of share value. This can be a significant financial benefit, especially in successful and growing companies.
Employee Savings and Investment Opportunities: Some schemes, like SAYE, allow employees to save money over a set period, with the option to buy shares at a discounted rate. This can be an effective savings and investment method.
Enhanced Company Culture: Share schemes can foster a more inclusive and positive company culture, as employees feel more valued and recognized for their contributions.
Flexibility in Reward Strategy: ESS offers flexibility in how companies reward and incentivize their staff. It's an alternative or complement to traditional salary increases or bonuses.
Long-Term Commitment: These schemes often encourage a long-term commitment from employees, as there can be vesting periods or other conditions before they fully realize the benefits.
In summary, Employee Share Schemes in the UK offer numerous advantages, including increased employee engagement, talent retention, tax benefits, and enhanced company performance. They represent a strategic tool for companies looking to foster a more committed and productive workforce.
Tailor Your Share Scheme
To tailor a share scheme to the desires and desires of your enterprise, you may take the following steps:
Rewards for meeting objectives - make the award of shares or grant of options depending on accomplishing sure milestones, eg meeting specific sales goals.
Stock market flotation - structure the share scheme so that employees end up entitled to shares simplest if you promote or go with the flow of the organization on the inventory marketplace.
Limit the proportion scheme to certain key personnel, e.g. people with scarce managerial or technical talents.
Length of the carrier - require a positive number of years' provider to qualify for shares - however make sure you don't discriminate, eg it can quantity to illegal oblique sex discrimination if employees want five years' service to participate in your scheme however women on your business have a tendency to have less provider than men.
Consider special percentage schemes - run a mixture of share schemes or offer greater favourable phrases for administrators, eg a corporation management incentive scheme for administrators and a proportion incentive plan for another workforce. Consider the rules for tax-advantaged schemes earlier than doing so.
Other Types of Sharing Schemes
Share schemes accredited by way of HM Revenue & Customs (HMRC) can have tax and National Insurance contribution advantages. See HMRC-permitted share schemes. Taxed (unapproved) proportion schemes do not have tax blessings however they do not should meet the qualifying conditions for accepted schemes, meaning you've got greater flexibility in layout. See taxed employee proportion schemes.
While stocks in publicly traded companies can be bought and offered without difficulty, this isn't the case in a private employer, specifically when you have no plans to glide or sell the business. If you need employees to recognize the fee of their shares, recollect setting up and investment a worker gain accept as true with.
The worker benefit accept as true with can accumulate stocks on the market that aren't bought through anybody else and those can then be recycled - together possibly with newly issued stocks - to fulfil future demand from personnel.
Give some idea of how employees can see the value in their shareholding in case your corporation isn't publicly quoted. Shares in a personal business enterprise can be valued at the side of the Shares and Assets Valuation vicinity of HMRC.
Share Incentive Plans (SIPs)
If you get stocks through a Share Incentive Plan (SIP) and preserve them in the plan for five years you may no longer pay Income Tax or National Insurance on their value. Share Incentive Plans (SIPs) are a type of ESS that allow employees to save towards the purchase of shares in their employer's company. Employees can contribute up to £1,800 per year to a SIP, and the company can match their contributions with free shares.
You will now not pay Capital Gains Tax on shares you promote if you keep them inside the plan until you promote them. If you take them out of the plan and maintain them after which promote them later on, you would possibly pay Capital Gains Tax if their fee has multiplied.
There are 5 approaches you may get shares under SIPs:
1. Free Shares
Your agency can come up with up to £3600 of loose shares in any tax yr.
2. Partnership Stocks
You can buy stocks out of your profits before tax deductions. There’s a restriction to how a good deal you may spend - either £1,800 or 10% of your profits for the tax 12 months, whichever is lower.
3. Matching Shares
Your organization can provide you with up to two free matching shares for every partnership percentage you buy.
4. Dividend shares
You can be able to buy extra shares with the dividends you get from free, partnership or matching shares (however simplest in case your organization’s scheme allows it).
You will not pay Income Tax if you maintain the dividend shares for at least 3 years.
5. Company Share Option Plan
This offers you the choice to shop for as much as £30,000 well worth of shares at a hard and fast price. You will no longer pay Income Tax or National Insurance contributions at the difference between what you pay for the shares and what they’re really well worth.
SAYE
A Save-As-You-Earn (SAYE) scheme permits employers to provide personnel proportion alternatives on a favourable tax basis. Employees contract to save a fixed quantity over a hard and fast savings duration, at the quit of which the financial savings can, in sure situations, entice a tax-unfastened bonus (see Question 5).
A 3 or 5-yr savings duration is ready at the start, as is the most variety of shares which can be offered on the applicable choice fee with the entire savings (and if it applies, an advantage) at the end of the settlement. The option fee may be at a discount of up to twenty% of the stocks' marketplace fee at the time of grant.
To offer SAYE, an enterprise have to either have its stocks listed or now not be below the control of another business enterprise, until that employer is indexed.
EMI
Enterprise Management Incentives (EMIs) are designed to incentivize employees who have a significant impact on the success of a company. Under an EMI scheme, employees can be granted options to purchase shares in the company at a discounted price. Enterprise Management Incentives (EMI) alternatives give huge tax benefits to smaller trading companies by granting share alternatives to selected personnel.
An organization can best provide EMI if it meets the subsequent situations:
It (or its organization) has gross assets of no extra than GBP30 million.
A sizable part of its enterprise buying and selling sports complies with the specific requirements within the applicable tax regulation.
It has fewer than 250 employees. Part-time employees are counted proportionally.
The stocks over which the options are granted ought to share in the organization's ultimate parent enterprise. The institution needs to include as a minimum one company whose commercial enterprise trading sports comply with the legislative requirements (referred to above), and a good sized part of the group's commercial enterprise has to meet the one's necessities. The organization's subsidiaries need to all be 51% subsidiaries.
CSOP
Under a Company Share Option Plan (CSOP), an employer can give employees alternatives to buy a fixed wide variety of stocks at a hard and fast price and within a hard and fast length. Options are typically granted at a fee that is identical to the shares' market cost at the date of furnish (they cannot be granted at a lower rate) and aren't commonly exercisable for 3 years from the date of grant.
To offer a CSOP, an enterprise has to both have its stocks indexed and not be under the control of another company. CSOPs are rather famous with indexed corporations because of their tax performance. They are usually used collectively with a non-tax favoured share alternative plan if the agency offers alternatives in excess of the man or woman CSOP limit (see below, Non-Tax Favoured Share Option Plan).
Non-Tax Favoured Share Option Plan
A corporation can provide percentage alternatives to any employees on any phrase. Any proportion choice plan that is not SAYE, EMI, or CSOP is a non-tax-favoured proportion option plan. Any form of employer can perform a non-tax-favoured share option plan.
These plans are utilized by businesses that do not qualify for any of the tax-efficient plans or that supply options to employees over the maximum limit set through the CSOP (see above, CSOP).
Can You Sell Employee Shares?
Yeah, you can usually sell employee shares in the UK. But, it depends on the type of share scheme you're in and what the rules say. Some schemes might have restrictions on when and how you can sell your shares.
For example, you might have to wait for a certain amount of time before you can sell them. Or, you might need to get permission from your employer first. But, if there aren't any restrictions, you can usually sell your shares on a stock exchange or to someone else who's interested. Just keep in mind that there might be tax implications when you sell your shares, so it's a good idea to get some advice to understand what's going on.
What Happens To Employee Shares When You Leave?
What happens to the shares you got from work when you leave a company in the UK depends on the rules of the share scheme and the company. If you haven't had the shares for long enough, you might lose some or all of them. If you can keep them, you might be able to sell them back to the company or someone else.
You might also be able to give them to someone else, like a family member or a trust. But, there might be some restrictions on when and how you can do this. It's important to read the rules of your share scheme to understand what will happen to your shares when you leave. And, it might be a good idea to get some help to understand any tax stuff that goes with it.
Let’s explore some possible scenarios:
Vesting Period
If you leave a company before your shares have fully vested, you may lose some or all of your shares. The vesting period is the period of time you need to remain employed with the company in order to be fully entitled to your shares. If you leave before the end of the vesting period, you may only be entitled to a proportionate amount of your shares.
Transferable Shares
Some share schemes may allow you to transfer your shares to another person or entity, such as a family member or a trust, when you leave the company. This will depend on the specific terms of the share scheme.
Sale of Shares
If you are entitled to keep your shares when you leave the company, you may have the option to sell them back to the company or to another shareholder. This will depend on the specific terms of the share scheme and the company's policies.
Retention of Shares
In some cases, you may be entitled to keep your shares when you leave the company, regardless of whether they have fully vested. However, you may still be subject to certain restrictions on when and how you can sell or transfer your shares.
It's important to review the terms of any share scheme you participate in to understand what will happen to your shares if you leave the company. You may also want to seek professional advice to fully understand your options and any tax implications of selling or transferring your shares.
Key Changes and Updates in 2024
Capital Gains Tax (CGT) and Dividend Allowances: There have been significant changes in the Capital Gains Tax and dividend allowances. The CGT Annual Exempt Amount has been reduced from £12,300 to £6,000 in April 2023 and will further decrease to £3,000 from April 2024. Similarly, the annual dividend allowance has been reduced to £1,000, further reducing to £500 in April 2024. These changes imply that more employees will need to consider tax implications when holding and selling shares received through employee share schemes.
Changes to SAYE and SIP Schemes: The UK government has shown a keen interest in the Save As You Earn (SAYE) and Share Incentive Plan (SIP) schemes. A call for evidence was launched to gather feedback on these schemes, especially focusing on improving their accessibility and simplifying the processes for businesses to set them up. This initiative aims to boost participation, particularly among low-income earners. Additionally, SAYE schemes have seen a reintroduction of bonus rates linked to Bank of England Bank Rates since August 2023.
National Insurance Contributions: There has been a reduction in National Insurance Contributions from January 2024. This change is part of a broader effort to simplify financial instruments like ISAs and employee share schemes.
HMRC Reporting and Compliance: Employers operating employee share schemes need to be aware of key reporting dates and compliance requirements. For instance, annual returns for these schemes must be submitted to HMRC by specific deadlines (like 6 July for the 2023 tax year), and new registrations can take time, so it's advisable to start the process early. Additionally, from April 2023, the number of mandatory data fields in the ERS returns has increased, necessitating employers to source additional information.
Employee Trusts Registration: Employee trusts, including those established to operate employee share plans, are required to register with HMRC’s Trust Registration Service (TRS) if they incur certain UK tax liabilities. This registration is an essential compliance aspect for employers and trustees involved in these schemes.
These updates signify the government's commitment to making employee share schemes more beneficial and accessible. The changes are directed towards simplifying the schemes, enhancing tax benefits, and ensuring better compliance and reporting standards. For businesses and employees participating in these schemes, staying informed about these changes is crucial for maximizing benefits and ensuring compliance.
How a Tax Accountant Can Help You Manage Employee Share Schemes
In the complex landscape of UK employee share schemes, a tax accountant plays a crucial role in ensuring that both employers and employees understand and effectively manage the tax implications of these schemes. Their expertise is invaluable in navigating the intricate tax laws and regulations associated with employee share schemes.
Understanding the Basics of Employee Share Schemes
Employee Share Schemes (ESS) in the UK come in various forms, such as Share Incentive Plans (SIPs), Save As You Earn (SAYE) schemes, Company Share Option Plans (CSOPs), and Enterprise Management Incentives (EMIs). Each has unique tax implications, making the role of a tax accountant essential for proper management.
Tax Compliance and Reporting
Scheme Set-Up: A tax accountant assists in setting up the ESS in compliance with HMRC requirements, ensuring that the scheme meets all tax-efficient criteria.
Annual Reporting: They handle the annual reporting obligations to HMRC, ensuring accurate and timely submission of necessary documents like ERS Annual Returns.
Taxation Advice for Employers and Employees
For Employers: Tax accountants provide guidance on the tax deductibility of expenses related to ESS and help in structuring the schemes in a tax-efficient manner.
For Employees: They offer advice on the tax implications at different stages of the scheme - granting, vesting, exercising options, and disposing of shares.
Navigating Complex Tax Rules
Tax accountants have in-depth knowledge of the intricate tax rules surrounding ESS.
They can navigate through complexities such as:
The implications of Income Tax and National Insurance Contributions (NICs) at the point of exercise and sale of shares.
Capital Gains Tax (CGT) calculations and applicable reliefs, such as Business Asset Disposal Relief for certain ESS.
Tax Planning Strategies
Maximizing Tax Efficiency: Tax accountants develop strategies to maximize the tax efficiency of ESS for both employers and employees.
Future Planning: They provide foresight on potential tax changes and advise on how these could impact current and future ESS.
Assisting with HMRC Inquiries and Audits
In the event of HMRC inquiries or audits related to ESS, a tax accountant represents the company, handling all communications and ensuring that the company’s interests are protected.
Training and Education
Tax accountants often conduct training sessions for employers and employees to educate them about the ESS's tax aspects, ensuring everyone involved understands their tax obligations and benefits.
The role of a tax accountant in managing Employee Share Schemes in the UK is multifaceted and crucial. They ensure compliance, provide strategic tax planning, and navigate the complexities of tax laws, thus playing a key role in the successful implementation and management of these schemes.
Conclusion:
ESS can provide a range of benefits for both employees and companies. For employees, ESS can provide the opportunity to acquire a stake in the company and benefit from its growth. This can help to align the interests of employees and shareholders, leading to a more motivated and productive workforce.
For companies, ESS can be a cost-effective way to attract, retain, and motivate employees. By granting shares or share options, companies can incentivize employees to work towards the company's goals and contribute to its success. This can result in improved performance, increased employee engagement, and reduced staff turnover.
However, ESS can also come with certain risks and challenges. For example, the value of shares acquired through an ESS can fluctuate, and employees may be required to hold the shares for a specified period of time before they can sell them. In addition, companies may face tax implications, such as National Insurance Contributions, when granting shares or options under an ESS.
Employee Share Schemes are a valuable tool for companies looking to incentivize and retain employees, and for employees looking to acquire a stake in the company they work for. However, companies and employees should carefully consider the risks and challenges associated with ESS, and seek professional advice where necessary.
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