CAPITAL ALLOWANCES

1. Definition of capital allowances

Capital allowances are a form of relief granted to any company which incurred qualifying
capital expenditure during a basis period in respect of non-current assets, in use at the end of
the basis period, for the purpose of a trade or business.

Capital allowances are granted in place of depreciation which is usually disallowed for
income tax purposes.

2. Conditions for granting capital allowances

Capital allowances are granted on fulfilment of the following conditions:
a) The qualifying capital expenditure is owned by the taxpayer making the claim as at the
end of the basis period.
b) The taxpayer made use of the qualifying capital expenditure for the purpose of its trade
or business
c) The qualifying capital expenditure is in use as at the end of the basis period
d) The value of the qualifying capital expenditure is not less than ₦500,000 and
presentation of an acceptable certificate obtained from the Inspectorate Division of the
Federal Ministry of Industry.
However, it is to be noted that the period of temporary disuse is ignored for this purpose
provided that the asset is brought into use before disposal.

3. Types of capital allowances

These include:
a) Initial allowance
This is a relief that is granted in the year of assessment in the basis period of which a
qualifying expenditure was incurred. Therefore, this allowance is granted once in the life
of any asset for as long as it is beneficial, owned and used by the same owner.

b) Annual allowance
This allowance is granted every year, on the residual (written down) value of a
qualifying capital expenditure, incurred on non-current assets, after deducting the initial
allowance. It is computed on a straight-line basis.

c) Balancing allowance
The balance allowance is the difference between the tax written down value and the
sales proceeds on disposal of a non-current asset. Where the tax written down value
exceeds the sales proceeds, the difference is called balancing allowance. Proceeds also
include insurance claims.

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 d) Balancing charge
The same process is used to derive balancing allowance and charge. Where the tax
written down value is less than the sales proceeds, the difference is balancing charge.

e) Investment allowance
Investment allowance is an incentive granted where a company has incurred a qualifying
capital expenditure on plant and equipment (Section 32 (1) of CITA) or on plant and
machinery (Second Schedule, Para. 18 (3) of CITA). The allowance is granted at the rate
of 10% of qualifying capital expenditure. It is not used in ascertaining the tax written
down value of a qualifying capital expenditure.

f) Rural Investment allowance

This allowance is granted in addition to an initial allowance to a company that incurs a
qualifying capital expenditure on the provision of facilities such as electricity, water or
tarred road for the purpose of a trade or business which is located at least 20 kilometres
away from such facilities provided by government.

The rate of the rural investment allowance is as follows:

i) No facilities at all - 100%
ii) No electricity - 50%
iii) No water - 30%
iv) No tarred road - 15%
This allowance is granted against the projects of the year in which the facility falls and
the balance or any balance on it shall not be carried forward to any subsequent year.
4. Definition of qualifying expenditure
Qualifying capital expenditure means expenditure incurred on non-current assets used for
trade or business, which qualifies for capital allowances in the basis period.

5. Types of qualifying expenditure

Categories of non-current assets that qualify for the grant of capital allowances are as
follows:
a) Qualifying building expenditure
This is capital expenditure on buildings, structures or work of a permanent nature.

b) Qualifying industrial Building expenditure

It is capital expenditure on buildings or structures in regular use, such as a mill factory,
mechanical workshops, dock, port and wharf.

c) Qualifying mining expenditure

This is capital expenditure incurred on working a mine, oil well, etc.

d) Qualifying plant expenditure

It is capital expenditure incurred on plant, machinery and fixtures.

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 e) Qualifying plantation expenditure
This is capital expenditure incurred on clearing of land for planting, etc.

f) Qualifying research and development expenditure

It is capital expenditure incurred on equipment, facilities, patents and licences, etc.

g) Qualifying agricultural expenditure

This is capital expenditure incurred on plant in use for agricultural trade or business.

h) Qualifying public transportation expenditure

It is capital expenditure on new mass transit coach.

6. Capital allowances rates

The rates of capital allowances under CITA are as follows:
Initial Annual
% %
Qualifying expenditure in respect of:
Building expenditure 15 10
Industrial building expenditure 15 10
Manufacturing Industrial plant expenditure 50 25
Mining expenditure 95 Nil
Plant expenditure (excluding furniture and fittings) 50 25
Construction plant expenditure ( excluding furniture and fittings) 50 25
Furniture and fittings expenditure 25 20
Motor vehicle expenditure 50 25
Public Transportation motor vehicle (not less than 3 buses) 95 Nil
Plantation equipment expenditure 95 Nil
Agricultural plant expenditure 95 Nil
Housing estate expenditure 50 25
Ranching and plantation expenditure 30 50
Research and development expenditure 95 Nil

7. Treatment of Qualifying Capital Expenditures on acquired Second-Hand

When second-hand qualifying capital expenditures are made, the treatment is as follows:
a) Buildings
i) No initial allowance is granted;
ii) The annual allowance to be granted is based on the lower of the original cost of
acquisition of the qualifying capital expenditure and the new purchase price. For
example, where SAU Ltd acquired a building for ₦600,000 and later sold it to NUASA
Ltd for ₦900,000, the annual allowance to be granted to NUASA Ltd will be based on
₦600,000. No initial allowance will be claimed on it.
iii) Conditions (i) and (ii) above will hold if the original owner had earlier used the building
for business but if it can be proved that it was earlier used for private purpose or it has
not been put to use at all, it could be possible to claim both initial and annual allowance.

b) Other assets

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 There is no specific provision in respect of other assets, therefore, claim for both initial
and annual allowance can be allowed provided that the transactions are at arms-length.
Where the transactions are between related parties, then:
i) no initial allowance is allowed
ii) the annual allowance should be based on the unexpired tax written down values (life)
of the qualifying capital expenditures.

8. Restrictions under CITA

Capital allowances to be deducted from assessable profits of companies in any year are
restricted to 66⅔% of the assessable profits, except for companies engaged in agro-allied
industry and manufacturing.

In addition, the following further restrictions apply:

a) Where there is partial private use, capital allowance is restricted to the official use; and
b) Where the basis period is less than 12 months, capital allowance is restricted to the
number of months in the basis period.

9. Basis period for capital allowances

a) Basic principles
Capital allowances are granted in an assessment year in respect of assets acquired or
qualifying capital expenditure incurred in the preceding year of assessment. The basis
period for capital allowances is the same as that for the assessment of the profits of a
company.
Example
A company makes up its accounts to October 31 each year. It acquired assets as follows:
Date Assets Purchased Cost (₦)
30/4/15 Building 6 million
21/9/15 Motor vehicle 4 million
27/8/16 Machinery 7 million
15/7/17 Furniture 2 million
Required:
State the basis period and compute the capital allowances for all the relevant years.

Answer
i) Basis of Assessment
Assessment year Basis period for assessment Basis Period for capital
Allowance
2016 1/11/14 – 31/10/15 1/11/14 – 31/10/15

2017 1/11/15 – 31/10/16 1/11/15 – 31/10/16

2018 1/11/16 – 31/10/17 1/11/16 – 31/10/17

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 ii) Computation of capital allowances
Building Motor Machinery Furniture Total
Vehicle
allowance
Initial allowance (%) 15 50 50 25
Annual allowance (%) 10 25 25 20
₦000 ₦000 ₦000 ₦000 ₦000
2016 year of assessment
30/4/15 – Building 6,000
21/9/15 - Motor vehicle 4,000
Initial allowance (900) (2,000) 2,900
Annual allowance (510) (500) 1,010
Total capital allowance 3,910
Written Down Value C/F 4,590 1,500
2017 year of assessment
27/8/16 – Machinery 7,000
Initial allowance (3,500) 3,500
Annual allowance (510) (500) (875) 1,885
Total capital allowance 5,385
Written Down Value C/F 4,080 1,000 2,625
2018 year of assessment
15/7/17 - Furniture 2,000
Initial allowance (500) 500
Annual allowance (510) (500) (875) (300) 2,185
Total capital allowance 2,685
Written Down Value C/F 3,570 500 1,750 1,200

Wk 1: Annual Allowance
6.000−900 4.000−2,000 7,000−3,500 2,000−500
10 4 4 5
= 510 = 500 = 875 =300

iii) Investment allowance

= ₦7,000,000 x 10% = ₦700,000

10. Determination of Basis period for Capital allowances during Commencement,

Cessation and Change of accounting date of a trade or business.

10.1 Commencement of trade or business

The problem of overlapping of basis periods under the commencement rule of CITA has
been resolved by the amendment made through the Finance Act 2019 to some extent.
However, the problem of overlapping is not completely eliminated.

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Example
Ogwa Limited is a company engaged in confectionary business. It commenced business on
April 1, 2019 and made up accounts as follows:
7 months ended October 31, 2019
Year ended October 31, 2020
Year ended October 31, 2021
Required:
State the basis period of assessment for each of the first three years of assessment of the
company.

Answer
a) In the first year of assessment, the basis period is from April 1, to October 31, 2019
b) In the second year of assessment, the basis period is from November 1, 2019 to October
31, 2020.
c) In the third year of assessment, the basis period is from November 1, 2019 to October
31, 2020.

Example
Ogwa Limited was incorporated on April 22, 2018 but commenced business on August 1,
2018. Its accounts for the following years of operation showed the following adjusted
profits:
`
₦000
Nine months to April 30, 2019 16,000
Year ended April 30, 2020 25,000
Year ended April 30, 2021 37,000

The company purchased the following qualifying capital expenditure:

₦000
May 12, 2018 – Factory Building 8,000
November 18, 2018 – Furniture 2,500
March 20, 2019 – Delivery Van 2,000
June 24, 2019 – Motor vehicle 3,600

Required:
Based on the amendment provisions of Finance Act of 2019 to Section 29 of Companies
Income Tax Act (CITA) 2004:
a) State the basis period for the first four years of assessment and the capital allowance(s)
for the first four (4) years.
b) Compute the capital allowances due for the first four (4) years of assessment in respect
of the qualifying capital expenditure incurred by the company.
c) Compute the company’s tax liabilities for the first four (4) years of assessment.
Suggested Answer

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a) Determination of the basis period for the assessment years and for the capital
allowances.
Assessment year Basis period for assessment Basis Period for capital
Allowance
2019 1.8.2018 – 30.4.2019 1.8.2018 – 30.4. 2019
2020 1.5.2019 – 30.4.2020 1.5.2019 – 30.4.2020
2021 1.5.2019 – 30.4.2020 Nil
2022 1.5.2020 – 30.4.2021 1.5.2020 – 30.4. 2021
Year of
Assessment Basis period over-lapping period Period not overlapping
2019 1.8.2018 – 30.4.2019 Nil 1.8.2018 – 30.4.2019
2020 1.5.2019 – 30.4.2020 Nil 1.5.2019 – 30.4.2020
2021 1.5.2019 – 30.4.2020 1.5.2019–30.4.2020 Nil
2022 1.5.2020 – 30.4.2021 Nil 1.5.2020 – 30.4. 2021

When there is an overlapping basis period between two or more years of assessment, the
period common to them is deemed to form part of the earliest year of assessment, for the
purpose of determining the assessment year to which the initial allowances is allocated.

b) Note: Qualifying capital expenditure made before date of commencement of trade or

business is deemed to have been incurred on the first day of commencing business
Workings:
₦000 Year of Basis period
assessment
May 12, 2018 – Factory Building 8,000 2019 1.8.2018 – 30.4. 2019

November 18, 2018 – Furniture 2,500 2019 1.8.2018 – 30.4. 2019

March 20, 2019 – Delivery Van 2,000 2019 1.8.2018 – 30.4. 2019
June 24, 2019 – Motor vehicle 3,600 2020 1.5.2019 – 30.4. 2020

Computation of the capital allowances due for the first four (4) years
Factory Furniture Motor Total
Building Vehicle allowance
Initial allowance (%) 15 25 50
Annual allowance (%) 10 20 25
₦000 ₦000 ₦000 ₦000
2019 Year of assessment
12/5/2018 – Factory Building 8,000
18/11/2018- Furniture 2,500
30/3/2019 – Delivery van 2,000
Initial Allowance (IA) (1,200) (625) (1,000) 2,825
Annual Allowance (AA) (510) (281) (188) 979

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 Total capital allowance 3,804
Written down value C/f 6,290 1,594 812
2020 Year of assessment
Additions
24/6/2019 – Motor vehicle 3,600
Total 4,412
Initial Allowance (IA) (1,800) 1,800
Annual Allowance (AA) (680) (375) (700) 1,755
Total capital allowance 3,555
Tax Written down value C/f 5,610 1,219 1,912
2021 Year of assessment
Annual Allowance (AA) (680) (375) (700) 1,755
Written down value 4,930 844 1,212
Total capital allowance 1,755
2022 Year of assessment
Annual Allowance (AA) (680) (375) (700) 1,755
Tax written down value 4,250 469 512

Workings (WK)
WK 1: Annual Allowance – 2019
9 months Basis period
Factory building = (8,000-1,200)/10 =680 x 9/12= 510
Furniture = (2,500- 625)/5 =375*9/12 = 281
Motor van (2000-1000)/4 = 250x 9/12 =188

WK 2: Annual Allowance – 2015 to 2017

8.000−1200 2500−625
Factory building = 680 Furniture = =375
10 5
2000−1000
Motor van = = 250
4
3600−1800
Motor vehicle = = 450
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c) Computation of the company’s tax liabilities for the first four (4) years of assessment.
₦000 ₦000
2019 Year of assessment
Assessable profit 16,000
Capital allowance for year 3,804
Restricted to 66⅔% of ₦16,000,000 10,667
Relieved 3,804
Capital allowance c/f -

Total Profit 12,196

Income tax (₦12,196 at 30%) 3,659

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2020 Year of assessment
Assessable profit 25,000
Capital allowance brought forward -
Capital allowance for year 3,555
Total capital allowance 3,555
Restricted to 66⅔% of ₦25,000,000 16,667
Relieved 3,555
Capital allowance c/f -

Total Profit 21,445

Income tax (₦21,445 at 30%) 6,434

2021 Year of assessment

Assessable profit 37,000
Capital allowance brought forward -
Capital allowance for year 1,755
Total capital allowance 1,755
Restricted to 66⅔% of ₦37,000,000 24,667
Relieved 1,755
Capital allowance c/f -

Total Profit 35,245

Income tax (₦35,245 at 30%) 10,574
2022 Year of assessment
Assessable profit 41,000
Capital allowance brought forward -
Capital allowance for year 1,755
Total capital allowance 1,755
Restricted to 66⅔% of ₦41,000,000 27,333
Relieved 1,755
Capital allowance c/f -

Total Profit 39,245

Income tax (₦39,245 at 30%) 11,774