Capital Allowances and Rates In Nigeria

Most businesses have tangible pieces of properties or equipment that it owns and uses in operations to generate income. These properties known as fixed assets are recognized in the business’s books of account and an amount known as depreciation is set aside to set off the cost of the assets over its useful life. All business that has fixed assets have their depreciation methods, rates and each depreciation method leads to a different accounting profit, which will at the end, affect the taxable profit.

With this in mind, the companies income tax act allows for the computation of capital allowances for tax purposes instead of depreciation.

Capital allowance is a based erosion tax-sharing scheme that depletes the expected tax revenue and shifts it to the taxpayer as a reward for investing in fixed assets that will produce higher income. it is a tax relief granted to private businesses for incurring the qualifying capital expenditure. Capital allowance is allowed as a deductible expense against assessable profits of a business for tax purposes.

For capital allowance to be granted, certain conditions must be met, which are:

  • The asset must be owned by the business claiming capital allowance
  • The capital expenditure must be incurred on the asset concerned
  • The asset must be in use at the end of the basis period
  • The asset must be used for the trade or business whose profit is assessable to tax
  • A claim must be made by the taxpayer before it is granted

Capital allowance is of two types:

Initial allowance – This allowance is granted in the first year of purchase and when the asset is first used for the trade or business. It is granted once in the life of an asset. However, there are cases when in a life of an asset, an Initial allowance might be granted twice – when the asset purchased is a used item and the initial owner has already, claimed an initial allowance on it.

Annual allowance –  Annual allowance is granted every year that the asset is used in trade or business.  This is calculated till the asset is fully written of. The annual allowance is calculated by applying the rate on the cost of the asset, less initial allowance.

The claim for capital allowances is not automatic, so companies must claim it for the year under review before it is allowed.

Every company aside from those in the manufacturing or agro-allied industry shall be entitled to deduct not more than two-third of assessable profit. This makes the business pay tax on the remaining one-third of assessable profit.

Capital Allowances rates in Nigeria

Qualifying expenditure in respect of               Initial allowance rate              Annual allowance rate

Building Expenditure                                                                         15                                           10

Industrial building expenditure                                                       15                                           10

Mining expenditure                                                                            95                                          nil

Plant expenditure(excluding furniture &fittings)                        50                                          25

Manufacturing Industrial Plant expenditure                                50                                          10

Construction plant expenditure                                                       50                                          nil

Public transportation motor vehicle                                               95                                          nil

Ranching and plantation expenditure                                            30                                          50

Plantation equipment expenditure                                                 95                                          nil

Research and development expenditure                                       95                                          nil

Motor vehicle expenditure                                                               50                                          25

Agricultural plant expenditure                                                        95                                          nil

Housing Estate Expenditure                                                            50                                           25

Furniture and Fitting Expenditure                                                 25                                           20

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