WHAT BUSINESSES MUST KNOW FROM 2026
Nigeria’s tax landscape has entered a decisive new phase with the enactment of the Nigeria Tax Act, 2025, which takes effect from 1 January 2026. One of the most significant changes introduced by the Act is the complete overhaul of the capital allowance regime, a development with far-reaching implications for corporate taxpayers, investors, and financial reporting.
This article highlights the legal framework, structural changes, applicable rates, and compliance expectations under the new capital allowance regime, based strictly on the gazetted provisions approved by the National Assembly.
Legal Framework
Capital allowance is now governed by Section 27 of the Nigeria Tax Act, 2025, together with the First Schedule to the Act. The assessment, administration, and audit of capital allowance claims fall within the statutory powers of the Nigeria Revenue Service, established under the Nigeria Revenue Service (Establishment) Act, 2025.
With the repeal of the Companies Income Tax Act framework, the new Act establishes a simplified and uniform system applicable to all qualifying capital expenditure.
END OF THE OLD QUALIFYING TESTS
Under the repealed regime, capital allowance eligibility was tied to the well-known four tests: wholly, exclusively, necessarily, and reasonably incurred. These tests no longer apply.
Pursuant to Section 27 of the Nigeria Tax Act, 2025, capital allowance is now allowable only where two statutory conditions are satisfied:
- Business Use Requirement
The asset must be used in generating the assessable profits of the taxpayer. - Statutory Compliance Requirement
The expenditure must qualify as qualifying capital expenditure, and: Value Added Tax must have been charged and paid where applicable; or Import duty or levy must have been paid in respect of imported assets.
Failure to satisfy either condition disqualifies the expenditure from capital allowance. - REPEAL OF INITIAL AND ANNUAL ALLOWANCES
A major reform under the new Act is the abolition of the Initial Allowance and Annual Allowance structure previously applicable under company income tax.
In its place, Section 27 and the First Schedule introduce a single straight-line annual allowance system, with the following key features:
• Capital allowance is computed using one uniform annual rate.
• There is no initial allowance in the year of acquisition.
• The former balancing charge and balancing allowance system no longer applies.
• A notional residual value of 1% of the qualifying cost must be retained in the records until disposal. - APPLICABLE CAPITAL ALLOWANCE RATES
The Nigeria Tax Act, 2025 groups qualifying capital assets into three statutory categories, each with a prescribed annual rate:
• 10% Annual Rate
Applicable to permanent buildings, masts and communication infrastructure, heavy transportation assets, and agricultural plant and equipment.
• 20% Annual Rate
Applicable to plant and machinery, furniture and fittings, and mining plant and equipment.
• 25% Annual Rate
Applicable to motor vehicles, software, intangible capital assets, and other qualifying assets not specifically listed under the lower-rate categories.
The applicable rate is applied annually on the qualifying cost, subject to the 1% residual retention. - PRORATION RULES
Under Section 27, capital allowance is to be prorated where an asset is partly used to generate taxable income. However, the Act provides relief where:
• Non-taxable income constitutes less than 10% of total income, in which case proration is not required.
• Where assets relate to activities benefiting from economic development incentives, the allowance is restricted to profits from the qualifying business. - TRANSITIONAL AND DISPOSAL PROVISIONS
Transitional Assets
Where capital allowance had already been granted on an asset prior to 1 January 2026:
• Any unutilised allowance continues under the new regime; and
• A 1% notional residual value must be retained until disposal. - DISPOSAL OF ASSETS
On disposal, gains or losses are determined in line with the chargeable gains provisions of the Nigeria Tax Act, 2025. The former balancing charge framework no longer applies. - ROLE OF THE NIGERIA REVENUE SERVICE
The Nigeria Revenue Service (Establishment) Act, 2025 empowers the Service to assess, review, and audit capital allowance claims. Importantly:
• There is no statutory requirement for prior approval before claiming capital allowance.
• Claims are made through the annual tax return, subject to audit and verification.
• Taxpayers are expected to maintain adequate documentation, including invoices, VAT evidence, import records, and asset registers. - IMPLICATIONS FOR NIGERIAN BUSINESSES
The new capital allowance regime requires businesses to:
• Review existing fixed asset registers and tax computation templates;
• Align accounting and tax systems with the straight-line allowance model;
• Ensure VAT and import duty compliance at the point of asset acquisition;
• Reassess investment decisions, deferred tax positions, and long-term tax planning.
Early preparation is essential to avoid disputes and compliance gaps as the new regime takes full effect - CONCLUSION
The Nigeria Tax Act, 2025 represents a deliberate move towards simplicity, transparency, and consistency in capital allowance administration. While the framework is more straightforward, it places greater emphasis on documented compliance and accurate classification of assets.
Businesses that proactively adjust their systems and policies will be better positioned to manage tax risks and optimise compliance under the new law
