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
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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 Expenditure | Initial Allowance (%) | Annual Allowance (%) |
| Industrial (Industrial and Non-industrial) | 15 | 10 |
| Mining | 95 | Nil |
| Plant: Agricultural production Others | 95 50 | Nil 25 |
| Furniture & fittings | 25 | 20 |
| Motor Vehicles: Public transportation Others | 95 50 | Nil 25 |
| Plantation equipment | 95 | Nil |
| Housing estate | 50 | 25 |
| Ranching & plantation | 30 | 50 |
| Research &development | 95 | Nil |
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Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.
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