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HMRC internal manual

VAT Finance Manual

From
HM Revenue & Customs
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Islamic products: Lease and lease plus purchase: Lease and purchase (ljara-wa-lqtina)

Description

This product is the same as the Ijara described above except that title to the asset is expected to pass to the customer at some time, usually at the end of the contract period. It can be used to purchase both goods and property.

VAT treatment (goods)

This product will be treated in the same way as a Hire Purchase/Conditional Sale (please 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 additional charge above the price of the goods will be treated as consideration for a deferred payment facility and thus exempt under the VAT Act 1994, Schedule 9, Group 5,item 3.

VAT treatment (property)

Where the bank is the absolute legal and beneficial owner of the property the transaction will be treated in the same way as for goods (e.g. Hire Purchase/Conditional Sale), except that the normal rules for property will apply for the sale of the asset (please see Notice 708 Buildings and Construction, Notice 742 Land and Property and Notice 742A Opting to tax land and buildings). The additional charge above the price of the property will be treated as consideration for a deferred payment facility and thus exempt under the VAT Act 1994, Schedule 9, Group 5, item 3.

Where the bank is unlikely to be the absolute legal and beneficial owner of the property, but takes title only by way of security, the assignment of the title by the customer to the bank operates by way of a mortgage. Any payments made by the customer to the bank will be repayments of the loan and, where the amount repaid is greater than the capital sum advanced, will be consideration for a grant of credit and be exempt under the VAT Act 1994, Schedule 9, Group 5, item 2.

When property is transferred as part of the purchase of a going concern the bank will not have operated the business. Where the consideration of in regard to the property the liability will follow the normal rules for property (see VATFIN8330).