VATFIN8260 - Islamic products: Price plus "profit": Price plus "profit" involving commodity transactions (commodity Murabaha)

Description

This product is essentially a loan facility from a financial institution (e.g. a bank), but instead of lending the money and charging interest it uses commodities and deferred payments to achieve the same end effect. This product can operate in either of the following ways:

Example 1: A customer requires a loan of £10,000. The bank purchases commodities from a supplier for £10,000, taking title, and then sells immediately to the customer for £10,500 (price + “profit”), allowing the customer to defer payment, either over a set period or until a specified future date. The customer takes title to the commodities. The customer, using the bank as its agent, then immediately sells the commodities for £10,000 to a purchaser (the bank makes no charge to the customer for acting as agent). 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 £10,000 cash is credited into the customer’s account for the customer to use as he/she wishes. The £500 “profit” on the sale of the commodity by the bank to the customer is what the bank makes from the deal.

Example 2: A customer requires a loan of £10,000. The bank, using an agent, purchases commodities from a supplier for £10,000, taking title, and sells immediately to the customer for £10,500 (price + “profit”), allowing the customer to defer payment, either over a set period or until a specified future date. The customer takes title to the commodities. 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 £500 “profit” on the sale of the commodity by the bank to the customer is what the bank makes from the deal.

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.