Capital allowance is an allowance granted for income tax purposes instead of depreciation. It reduces the taxable profits and tax liability of a business. However, a taxpayer in Nigeria must fulfill four (4) conditions so as to claim capital allowance in a year of assessment. One of these conditions is that a taxpayer must get an acceptance certificate for any Qualifying Capital Expenditure of Five million Naira (NGN5,000,000) and above. Paragraph 37 of the Business Facilitation Act 2023 has changed the threshold from NGN500,000 to NGN5 million. Another name for acceptance certificate is Certificate of Acceptance of Fixed Assets (CAFA). The Industrial Inspectorate Division (IID) of the Federal Ministry of Industry issues CAFA.
Under the Industrial Inspectorate Act (IIA) 2004, IID estimate the cost of any projected, new and existing capital expenditure. Hence, companies must inform IID of its intention to incur capital expenditure. The process involves preliminary confirmation of fixed assets schedules, preparation and submission of a written application. Next, IID will check the submission and conduct a physical inspection of the company’s asset. If satisfied, IID will issue a Certificate of Acceptance of Fixed Assets (CAFA). The certificate shows the name of taxpayer, value of capital expenditure and year of acquisition.
Without CAFA, a taxpayer in Nigeria may have issues in reporting the value of its fixed assets to different regulatory bodies. For instance, the Federal Inland Revenue Service (FIRS) may disallow a taxpayer’s claim on capital allowance if the third party documentation is inadequate, and acceptance certificates are not available. Tax records are also open for the last six years, and FIRS can always perform a back-duty investigation. A company with taxable profits will have to forfeit the relief and pay tax on the disallowed amount. Think of the amount that a company could have saved if a CAFA was available.
Furthermore, the Financial Reporting Council of Nigeria (FRCN) provides that a company may not be able to recognize fixed assets in its audited financial statements without CAFA. The process of getting a CAFA is time-consuming and difficult. It takes between 3 months to 12 months or even more before the certificate is issued. BRC has helped several companies to process and get CAFA. If you want to know more about how we can assist your business, then feel free to send a message.
Relevant provisions are in the Second schedule of CITA
Updated: 6 April 2023
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