VATFIN8500 - Islamic products: agency (wakala)

This is an investment product, which functions in the same way as Mudaraba, which is discussed at VATFIN8600. The difference between the two is that with a Mudaraba all the profit is divided between the parties, whilst with a Wakala the investor receives only the agreed ratio against investment. Anything made above that ratio is kept by the financial institution and not given to the investor.

Example: an investor agrees to invest a sum with the bank for an agreed return (e.g. 5%). The bank pools the investor’s funds with the funds of other investors and its own capital and invests in Sharia’a compliant assets. At the end of a given period (e.g. a month) the bank returns the invested sum to the investor along with the agreed 5%. Any additional revenue that the bank makes on the customer’s money is kept by the bank (e.g. if the bank makes 6% then 5% is given to the customer and the additional 1% is kept by the bank). If the bank does not make the agreed percentage return then the investor gets what has been made whilst the bank gets nothing (e.g. if only 4% is achieved then the investor gets the full 4%).

VAT treatment

The VAT treatment depends on whether the bank or other financial institution makes the investment decisions (discretionary or ‘unrestricted’) or whether it follows the instructions of its clients (non-discretionary or ‘restricted’).

Where the bank makes the investment decisions any charges made by the bank to the investor will follow the policy set out in paragraph 2.10 of VAT Notice 701/49 Finance. The additional profit made by the bank will be outside the scope of VAT.

Where the bank follows the instructions of its clients the additional revenue made by the bank on the investment of the capital will be taxable at the standard-rate. This is because what the bank is doing is a form of portfolio / investment management. See paragraph 7.1 of Notice 701/49 Finance.