A Deep Dive into Capital Allowance under the Nigeria Tax Act, 2025: How Businesses Should Treat Their Assets for Tax Purposes
A Deep Dive into Capital Allowance under the Nigeria Tax Act, 2025: How Businesses Should Treat Their Assets for Tax Purposes
By Baha’s Books | www.bahasbooks.com
The Nigeria Tax Act, 2025 continues its comprehensive framework on Capital Allowance in the First Schedule, detailing how companies should handle the cost of assets—such as machinery, buildings, and leased property—when computing their tax obligations. This section of the law provides clarity on what qualifies as capital expenditure, who can claim allowances, how ownership and usage are treated for leased assets, and what happens when those assets are sold or disposed of. It represents one of the most practical and technical components of Nigerian tax law, designed to strike a balance between rewarding genuine business investment and maintaining fiscal accountability.
Understanding Capital Allowance under Nigerian Law
Capital allowance exists because business assets lose value over time as they are used to generate income. Rather than allowing businesses to deduct the full cost of an asset in a single year, the government permits them to spread that deduction across several years through capital allowance. This ensures that the tax system reflects both the asset’s useful life and the ongoing benefit it provides to the business.
The Nigeria Tax Act, 2025 refines this system to ensure fairness and precision, defining who can claim allowances, what kind of spending qualifies, and under what conditions the deductions may continue or stop.
Assets under Hire Purchase and Finance Lease Arrangements
The law begins with rules governing assets acquired under hire purchase or finance lease agreements, which are common methods of financing business equipment. Here, the law makes three crucial clarifications.
First, the qualifying capital expenditure a lessee (the user of the asset) can claim in any given year is limited to the total installment payments made during that year, excluding any interest payments. In other words, only the actual capital cost counts for allowance purposes—interest or finance charges do not qualify.
Second, the “owner” of the asset, for tax purposes, is not necessarily the legal owner but rather the lessee or hirer—the party actually using the asset and bearing the economic risk. This reflects the economic reality that the person gaining benefit from an asset’s use should be the one entitled to claim its capital allowance.
Third, the lessor (the person or company leasing out the asset) cannot claim any capital allowance on that same asset under sections 27 and 28 of the Act. This rule prevents double claims and ensures that allowances follow the asset’s real use, not merely its legal title.
This approach aligns Nigeria’s tax policy with international best practices, making it clear that the right to claim capital allowance lies with whoever truly utilizes the asset in generating taxable income.
Mining Expenditure: Recognizing High-Risk Investment Activities
The Act next deals with qualifying mining expenditure, acknowledging the unique challenges of Nigeria’s extractive industries. Mining, exploration, and related operations require substantial upfront costs, long-term investment, and significant risk, especially before any revenue is earned.
Under this law, qualifying mining expenditure includes all costs incurred in acquiring or developing information about the existence and extent of mineral deposits. It covers geological surveys, sampling, testing, and drilling carried out to discover or verify mineral resources. Importantly, even if these expenses do not immediately result in an operational mine or tangible asset, they still qualify as capital expenditure as long as they are directly connected to mining operations.
This provision ensures that companies engaged in resource exploration can obtain fair tax relief for their investment in discovery and testing activities. It reflects Nigeria’s recognition of the capital-intensive nature of mining and its desire to promote exploration and industrial growth within this key sector.
Relevant Interest: Clarifying Ownership in Buildings and Structures
The Act then introduces the concept of “Relevant Interest.” This is vital in determining who is entitled to claim capital allowance when a building or structure is involved.
Where an asset consists of a building, structure, or permanent works, the owner is defined as the person holding the relevant interest in that asset. The “relevant interest” refers to the ownership or leasehold right associated with the construction or possession of the building.
For instance, if a company constructs an office building or factory on leased land, it holds the relevant interest for tax purposes because it financed the construction and derives benefit from its use. If a person has multiple interests in the same building—say, a temporary lease and a reversionary interest (the right to regain full ownership later)—the reversionary interest is considered the relevant one. This ensures that the person with the most enduring right to the asset is recognized as its owner under the tax law.
This principle avoids confusion over overlapping ownership rights and guarantees that the capital allowance claim belongs to the party with the true financial stake in the building or structure.
Qualifying Building Expenditure: What It Covers
The Act provides a broad definition of qualifying building expenditure, which includes costs incurred in constructing permanent buildings, structures, or works used for trade or business. The key condition is that these structures must be used wholly or mainly for business purposes.
The law lists a wide range of qualifying examples: factories, workshops, warehouses, office buildings, housing used for business operations, hotels, wharfs, silos, jetties, and other industrial or agricultural structures such as plantations or mines. Even infrastructure built to support production or service delivery qualifies.
This means that a company constructing a manufacturing plant, an oil terminal, or a logistics warehouse can claim capital allowance on the entire cost of construction, provided that the asset is employed in earning taxable income.
Computation of Capital Allowance
The Act establishes a key rule for determining when and how capital allowance can be claimed. Whenever a person, during a basis period (an accounting year), incurs qualifying expenditure wholly and exclusively for business purposes, they are entitled to an annual allowance calculated at rates specified in the Act’s capital allowance table.
The law also introduces two important administrative provisions.
First, a 1% notional entry must be recorded in the capital allowance computation schedule for statistical purposes. This figure is merely for government tracking and does not affect the actual amount of relief claimed.
Second, where the basis period for assessment is shorter than one year—such as in cases of a new business starting mid-year or a company winding down—the allowance is applied proportionately to the duration of that period. This ensures that deductions accurately reflect the time the asset was in productive use.
Conditions for Claiming Capital Allowance
The law further requires that, at the end of each basis period, two essential conditions must be met before a taxpayer can claim capital allowance for that year. The person must still be the owner (or holder of the relevant interest) in the asset, and the asset must have been actively used for business operations during that period.
This rule prevents businesses from claiming allowances on assets that are no longer used, have been sold, or have been taken out of productive service. It ties the relief to actual business utility, maintaining the link between tax benefits and genuine economic activity.
Residue of Qualifying Expenditure
A key technical concept introduced in this section is the residue of qualifying expenditure. This refers to the portion of an asset’s cost that remains after all capital allowances previously claimed have been deducted. The residue is essentially the unrelieved balance of the asset’s value, forming the basis for further allowances in subsequent years.
For example, if a company purchases equipment for ₦100 million and has claimed ₦60 million in allowances over several years, the remaining ₦40 million is the residue. Only assets still in active use for trade or business can continue to generate allowances based on their residue. This ensures that relief is granted only for assets contributing to ongoing income generation, not those that have become redundant or sold.
Disposal under Qualifying Expenditure
The Act concludes this section with provisions on the disposal of qualifying assets. When a building, structure, or other permanent work is sold, transferred, or otherwise disposed of, it triggers specific tax implications.
“Disposal” in this context includes selling the relevant interest in an asset or transferring the rights and benefits tied to it, such as under a concession or lease. Once disposal occurs, the company must assess whether a balancing allowance or a balancing charge arises.
A balancing allowance gives additional tax relief if the proceeds from the sale are less than the asset’s residual value. Conversely, a balancing charge applies when the sale proceeds exceed the remaining book value, meaning the company effectively recovers more than it had claimed as relief. These adjustments ensure that tax treatment remains fair and reflective of the asset’s true economic outcome.
Conclusion: A System Built for Accountability and Economic Growth
This portion of the Nigeria Tax Act, 2025 lays out a complete system for how businesses should handle long-term investments and fixed assets within the tax framework. It meticulously defines ownership rights, qualifying expenditures, and eligibility conditions, ensuring that capital allowance is granted only where assets genuinely support trade or production.
By aligning deductions with real economic use, the law prevents misuse while providing tangible benefits for businesses that invest in Nigeria’s industrial, mining, and infrastructure sectors. It also brings consistency, transparency, and predictability into corporate tax computations—three qualities that encourage both local and foreign investment.
For accountants, business owners, and tax practitioners, understanding these provisions is critical to optimizing compliance and ensuring that every eligible expense is properly captured for tax relief.
To learn more about Nigeria’s evolving business and tax environment, visit www.bahasbooks.com — your trusted resource for tax, accounting, and corporate advisory insights.
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