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HMRC internal manual

VAT Finance Manual

Islamic products: purpose of VATFIN8000

According to Islamic law (known as ‘Shariah’) the following are prohibited:

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

This has meant that many Muslims have been unable or unwilling to obtain conventional credit finance in order to purchase goods and/or services because those products break Shariah law.

In order to be able to provide Shariah compliant products financial institutions such as banks, along with boards of Shariah scholars, have worked together to create the various products, which are described within this section.

One of the ways financial institutions have found to circumvent the prohibition against the charging and receipt of interest is to use ‘profit’ obtained from the various investments. This mechanism is explained in the sections covering the products.

VATFIN8000 will assist you by explaining how each product works and by providing the relevant VAT treatment. They will also briefly discuss issues connected to the way the products work, such as:

  • intermediary services;
  • transfers of a going concern;
  • place of supply of services relating to land and property; and
  • partial exemption.

If you have any queries concerning the VAT treatment of any of the products in these sections please contact the Financial & Commodities VAT UoE.