What is Capital Allowance?

Capital allowance refers to the tax relief businesses can claim on certain types of capital expenditure.
It’s essentially a way for businesses to deduct the cost of certain assets from their taxable profits. These
assets include machinery, equipment, buildings and vehicles used for business purposes. This is to
encourage investment in productive assets by reducing the tax burden associated with acquiring them.
Capital allowance is the amount of capital investment costs, or money directed towards a company’s
long-term growth, a business can deduct each year from its revenue via depreciation.
In accounting, capital allowance refers to the systematic allocation of the cost of a tangible asset over
its useful life. This allocation is typically done through depreciation for fixed assets like buildings,
machinery, and vehicles. Essentially, it spreads the cost of the asset over its expected useful life to
reflect its gradual consumption or obsolescence. This practice helps match the expense of the asset with
the revenue it helps generate over time, providing a more accurate representation of the company’s
financial performance.
Capital allowance Is a relief granted to any business or individual who incurs or put to use Qualifying
Capital Expenditure during a Year Of Assessment (YOA).

TYPES OF CAPITAL ALLOWANCE

a. Initial allowance: Charged once in the life of an asset; One-off relief in the first year of
purchasing a QCE. This means initial allowance is calculated only once over the useful life
of an asset, It is not recurring.
b. Annual allowance: Charged Annually over the life of an asset after Initial Allowance has
been deducted.
c. Investment allowance: This is granted once in a life of a QCE and is used to encourage
investment in certain sectors of the economy.
d. Balancing Adjustment: This arises after when a QCE has been disposed of.
Examples of Qualifying Capital Expenditure (QCE):
Motor vehicle
Plant and Machinery
Industrial Building
Furniture & Fittings
Mining
Public Transportation

RECOGNIZING, MEASURING AND DISCLOSING CAPITAL ALLOWANCE

Recognizing, measuring, and disclosing capital allowances typically follow accounting standards and
tax regulations. Here are some general guidelines:
1. Recognition: Capital allowances are recognized when the asset to which they relate is recognized.
This means they are typically recognized at the same time the asset is recorded in the financial
statements.
2. Measurement: The measurement of capital allowances involves determining the allowable
deduction based on tax laws and accounting standards. This may involve different methods of
depreciation or capitalization, depending on the nature of the asset and the relevant regulations.
3. Disclosure: Companies should disclose their accounting policies for recognizing and measuring
capital allowances in their financial statements. This includes detailing the method used for
calculating depreciation or capital allowances, any changes in accounting policies, and the impact on
financial statements.

4. Compliance: Ensure compliance with relevant accounting standards (such as IFRS or GAAP) and tax
regulations. This may involve staying updated on changes in tax laws and regulations that affect the
calculation of capital allowances.
5. Consistency: Maintain consistency in the application of accounting policies for recognizing and
measuring capital allowances.
6. Disclosure of Tax Effects: Disclose any tax effects of capital allowances in the financial statements,
including deferred tax assets or liabilities arising from timing differences between accounting
depreciation and tax depreciation.
7. Review and Audit: Ensure that the calculation and disclosure of capital allowances are subject to
review and audit by internal or external auditors to verify accuracy and compliance with accounting
standards and tax regulations.
Always consult with accounting professionals or tax experts for specific guidance on recognizing,
measuring, and disclosing capital allowances, as regulations may vary depending on the jurisdiction
and the nature of the assets involved.

CONDITION FOR GRANTING CAPITAL ALLOWANCE:

i. The asset must be owned by the claimant (company making the claim).
ii. The asset must be incurred for the purpose of the business whose profit is accessible to tax
iii. The qualifying capital expenditure must be in use at the end of the year of assessment (YOA)
which the tax is being computed.
iv. A claim must be made in writing to the authority ‘Relevant Tax Authority’
v. Acceptance certificate must be issued
How Capital Allowance is applied
• After Capital Allowances is computed the amount is applied to the Assessable Profit before
arriving at the Chargeable Profit. The 30% Income Tax Rate is then applied to the Chargeable
Profit. There are however restrictions to how much capital allowances can be deducted from
your adjusted profit.
• Restriction on Capital Allowances: For businesses other than those in the Manufacturing and
Agricultural Sector, the maximum capital allowance that can be claimed can not be more
than two-third of the assessable profit. Meaning that tax must be paid on at least one-third
of the assessable profit.

THE IMPORTANCE OF CAPITAL ALLOWANCE IN BUSINESSES:

Capital allowances are an important tax relief for businesses. It can help them to reduce their taxable
profits and lower their tax liability. But companies must understand which capital expenditures are
eligible for capital allowances and how to claim them.
The process of making a claim can be complex and businesses need to seek the advice of a qualified
tax professional; This ensures compliance with tax regulations and claims the maximum amount of
relief available. Capital allowances are a valuable way for businesses to reduce their tax burden.
Capital Allowance rates in Nigeria
Qualifying expenditure
Initial
allowance (%)
Annual
allowance (%)

Building (industrial and
non-industrial) 15 10
Mining 95 NIL

Plant:
– Agricultural
production

95 NIL
– Others 50 25
Furniture & fittings 25 20
Motor vehicle:
– Public transportation 95 NIL
– Others 50 25
Plantation equipment 95 NIL
Housing estate 50 25
Ranching & plantation 30 50
Research & development 95 NIL

CONCLUSION:

The primary aim of capital allowances is to claim a proportion of the cost of the expenditure back
against your company’s taxable income or profits. In turn, this reduces your tax bill and allows you to
write off the cost of capital expenditure over time.
Capital allowances allow businesses to maximize their tax relief.

For more enquiry on Capital allowance , kindly contact us at SOW Professional Services Ltd.

Website: www.sowprofessional.com

Phone: 07038254989

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