Budget 2008 > Business > Islamic Finance
 

Islamic Finance

A number of legislative changes have been made in recent years, starting in Finance Act 2005, to treat a number of different financing techniques which are economically equivalent to debt finance as AFAs.

In each case the AFA is treated as a loan relationship for corporation tax purposes and the “alternative finance return” is treated as interest for the purposes of income tax and corporation tax.  The AFAs specified in law are based on a number of Shari’a compliant financing techniques namely murabaha, mudaraba, diminishing musharaka, wakala and sukuk.  However, there is no requirement for an AFA to be Shari’a compliant.

Section 98 Finance Act 2006 permits amendments to the tax treatment of AFAs by secondary legislation.  This power allows the introduction of provisions relating to new arrangements, but does not allow for amendments to the rules on existing arrangements.

Legislation will be introduced in Finance Bill 2008 to amend the power to make provision relating to AFAs by secondary legislation.   The amended power will introduce a further power to permit amendments to existing tax rules on AFA and will have effect on and after the date that Finance Bill 2008 receives Royal Assent.