VATFIN8240 - Islamic products: Price plus "profit": Basic price plus "profit" (Murabaha)

Description

This product can be used to fund the purchase of a variety of assets, including cars, fridges, televisions and property (both residential and commercial).

Example: A customer of a financial institution (e.g. a bank) wishes to purchase an asset but does not have the available funds. The customer therefore enters into an agreement with the bank under which the bank will purchase the asset for the sale price (e.g. £10,000), taking title, whilst the customer takes possession of the asset as agent for the bank. The bank will then sell the asset to the customer for sale price plus a “profit” (e.g. £15,000 (being the selling price of £10,000 and £5,000 “profit”)), allowing the customer to defer payment by instalment over a set period of time or to pay the total price at a specified future date. Title to the asset will always pass from the bank to the customer at the beginning of the arrangement.

VAT treatment (goods)

Where title to the asset passes from the bank to the customer the sale is treated in the same way as a credit sale (see paragraph 4.3 of Notice 701/49 Finance). There are two supplies being made by the bank– one of the goods and one of the facility to defer payment.

Consideration for supply of the goods will follow the normal liability rules. The “profit” element will be treated as consideration for the facility to defer payment and will be exempt under the VAT Act 1994, Schedule 9, Group 5, item 3.

VAT treatment (property)

As with goods, the sale is treated in the same way as a credit sale (see paragraph 4.3 of Notice 701/49 Finance). There are two supplies being made by the bank – one of the property and one of the facility to defer payment.

For the liability of the sale of the property you should read Notice 708 Buildings and construction, Notice 742 Land and Property and Notice 742A Opting to tax land and buildings.

The “profit” element will be treated as consideration for the facility to defer payment and will be exempt under the VAT Act 1994, Schedule 9, Group 5, item 3.

When property is transferred as part of the purchase of a going concern the bank will not have operated the business. Where the consideration is in regard to the property, the liability will follow the normal rules for property.