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HMRC internal manual

VAT Finance Manual

Islamic products: Price plus "profit": Price plus "profit" using commodity transactions (reverse Murabaha)

Description

This product is the reverse to the commodity Murabaha, and is normally used to affect a loan between financial institutions. As with the commodity Murabaha, described in the previous page, this product can operate in either of the following ways:

Example 1: Bank A requires a loan of £100m. Bank B purchases commodities from a supplier for £100m, Bank A acting as agent for Bank B but making no charge for doing this. Bank A takes title to the commodities. Bank A then sells the commodities immediately to Bank B for £105m (price + “profit”), allowing Bank B to defer payment, either over a set period or at a specified future date. Bank B takes title to the commodities. Bank B then immediately sells the commodities for £100m to an end-purchaser. All of this is done on spot (i.e. it is done almost instantaneously to avoid the risk of either a rise or fall in the commodity price). The £100m cash is credited into Bank A’s account

Example 2: Bank A requires a loan of £100m. Bank B purchases commodities from a supplier for £100m, taking title, and sells immediately to Bank A for £105m (price + “profit”), allowing Bank A to defer payment, either over a set period or at a specified future date. Bank A takes title to the commodities. Bank A, with Bank B now acting as its agent, immediately sells the commodities for £100m to an end-purchaser. All of this is done on spot (i.e. it is done almost instantaneously to avoid the risk of either a rise or fall in the commodity price). The £100m cash is credited into Bank A’s account.

VAT treatment

The VAT treatment of commodities is set out in Notice 701/9 Derivatives and Terminal Markets. Please note that there are separate rules covering supplies of investment gold, and these can be found in Notice 701/21 Gold.

The “profit” element made by the bank 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 2.