Capital Allowances to Claim for Your Business in Nigeria

Business owners need to understand different types of capital allowances to claim for their business. The one of major problems for entrepreneurs is the huge capital expenditure required to start a business. However, the good thing is that you can claim this huge capital expenditure by using it to reduce the tax liability of your business. Capital allowance allows you certain relief on the amount of money spent on qualifying capital expenditure. So, this article explains different capital allowances that you can claim for the business in Nigeria

What is capital allowance?

Capital allowance is the allowance grant to a business when incurring qualifying capital expenditure in a particular year of assessment. Qualifying capital expenditure includes plant and machinery, motor vehicles, furniture and fittings, and others. However, capital allowance is allowed instead of depreciation. This is because depreciation is a disallowable expense for tax purposes. So, you deduct capital allowance from assessable profit to get taxable or chargeable income.

However, capital allowance has a certain restriction for businesses except for agro‐allied industry and manufacturing companies. So, agro‐allied industry and manufacturing companies have no restriction on capital allowance to claim. You can claim the whole capital allowance from the available assessable profit. But, for other businesses, you can only claim two-third of the assessable profit.

Conditions for claiming capital allowance

For you to claim a capital allowance for your business, there are certain conditions to fulfill. These conditions include:

  • The claimant must own the asset concerned.
  • The business must incur qualifying capital expenditure on the asset concerned.
  • The asset must put to use at the end of the basis period.
  • The taxpayer must use the asset for business at the end of the basis period for which profit is subject to tax.
  • The taxpayer must obtain an acceptance certificate for any qualifying capital expenditure (QCE) above NGN500,000 from the Inspectorate Division of the Federal Ministry of Industry

Types of capital allowance in Nigeria

Initial allowance

This is the allowance that is claimable in the first year when a business purchase and use a QCE for business purpose. You can claim an initial allowance once in the life of an asset except if such asset is acquired second-hand. Therefore, all the second-hand assets enjoy an initial allowance except second-hand buildings on which the initial allowance has been claimed. However, you can calculate the initial allowance for business by multiplying the initial allowance rate for the asset with the cost of the asset. Also, you can’t prorate initial allowance

Annual allowance

The is the allowance that is claimable every year in which an asset is used for business purposes until the value of the asset is completely written off. You can prorate annual allowance based on the basis period as well as based on the private use. However, you can calculate the annual allowance by multiplying the annual allowance rate with value after deducting the initial allowance. I.e. Annual allowance = Annual rate * (Cost – initial allowance). Additionally, the asset cannot completely write off, the retention value of NGN10 must be maintained for every asset.

Investment allowance

This is the capital allowance claimable when a business incurs qualifying capital expenditure on plant and machinery. It has a flat rate of 10% on the cost of the asset. Also, it is given once in the lifetime of an asset. However, the investment allowance will only affect the total capital allowance to claim in a year, not the tax written down value. That is, investment allowance must not take into consideration when calculating tax written down value. However, you will not be given investment allowance and if it has been given, the tax authority has to withdraw it if any of the following occur within 5 years of purchase:

  • If the asset is transferred or sold to another person.
  • If the asset is used for other purposes than chargeable purposes.
  • If the asset is purchased for an artificial purpose. I.e. Solely to obtain the investment allowance.

Rural investment allowance

This is the allowance that is claimable when a business provides infrastructural facilities such as electricity, water, tarred road, and telephone for the business purpose. However, this facility must be provided 20 kilometers away from where such facility is provided by the government. Additionally, you can claim both initial allowance and rural investment allowance on an asset. But, you can claim investment allowance together with rural investment allowance on an asset. The rates to claim is given as thus:

No telephone                                                  5%

No tarred road                                                15%

No water                                                         30%

No electricity                                                   50%

No facilities at all                                            100%

Balancing adjustment

This occurs when a business disposes of an asset on which capital allowance has been claimed. It can be a balancing allowance or a balancing charge.

Balancing allowance

This occurs when the tax written down value is more than the disposable value on the day of disposal. It is deducted from assessable profit together with other capital allowances for that tax year.

Balancing charge

This occurs when the tax written value is less than the disposable value on the day of disposal. It is added to the assessable profit and is subject to tax accordingly. The amount of balancing charge to add to the assessable profit must be restricted to the lower between the actual allowance previously claimed and the actual balancing charge on the day of disposal.

Rates of capital allowance

Qualifying Capital ExpenditureInitial Allowance (%)Annual Allowance (%)
Industrial (Industrial and Non-industrial)1510
Mining95Nil
Plant: Agricultural production
Others
95
50
Nil
25
Furniture & fittings2520
Motor Vehicles: Public transportation
Others
95
50
Nil
25
Plantation equipment95Nil
Housing estate5025
Ranching & plantation3050
Research &development95Nil

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5 thoughts on “Capital Allowances to Claim for Your Business in Nigeria

  1. Pingback: How to Become a Successful Tax Consultant in Nigeria -
  2. I am not sure where you are getting your info, but good topic.

    I needs to spend some time learning much more or understanding more.
    Thanks for magnificent information I was looking for this info for my mission.

  3. You actually make it seem so easy with your presentation but I find this topic to be really something that I think I would never understand.
    It seems too complex and extremely broad for me.
    I am looking forward for your next post, I will try to get the hang of it!

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