Islamic products

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Islamic products
  • Background
  • Basic price plus ‘profit’ (Murabaha)
  • Price plus ‘profit’ involving commodity transactions (commodity Murabaha)
  • Reverse of the price plus ‘profit’ involving commodity transactions (reverse Murabaha)
  • Lease only (Ijara)
  • Lease and purchase (Ijara-wa-Iqtina)
  • Shared ownership (diminishing Musharaka)
  • Current and savings accounts (Mudaraba)
  • Agency (Wakala)
  • Intermediary services
  • Cross border supplies of land and property
  • Partial exemption
  • Further information

This guidance note provides an overview of the VAT treatment of Islamic products that are offered by banks located within the UK.

Background

VATFIN8000

The following activities are prohibited under Sharia'a law:

  • charging or receiving interest (riba)
  • uncertainty or deception, such as, an ambiguity or lack of clarity in the terms of a contract that can give rise to speculation (gharar)
  • gambling or speculation, such as, any transaction undertaken for purely speculative purposes (maisir)
  • unethical investments, such as, dealing in activities or commodities that include pork, pornography, arms or munitions, conventional financial services, cinema, tobacco, gambling or alcohol

As a result many Muslims are unwilling or unable to obtain conventional forms of credit within the UK in order to purchase goods or services. Certain financial institutions have in response developed financial products that are acceptable under Sharia'a law and these are discussed below.

HMRC also produced VAT Information Sheet 11/06 and a copy can be obtained via the following link:

Click here to view pdf

Basic price plus ‘profit’ (Murabaha)

Murabaha can be used to fund the purchase of a variety of assets, including cars, fridges, televisions and residential / commercial property.

Please see the following example of how this product works:

A customer of a bank would like to purchase a television but does not have sufficient funds available. The customer enters into an agreement with the bank under which the bank will purchase the asset for £3,000, taking title, whilst the customer takes possession of the asset as agent for the bank. The bank will then resell the television to the customer for £3,300 which is the sale price plus a ‘profit’. The bank then

More on Exempt supplies: