Can Tax Non Compliance Affect Your Capital Allowance?

When a business buys equipment, vehicles, software or other assets for its operations, the cost does not always disappear from its tax calculation immediately. Under Nigeria’s current tax framework, qualifying capital expenditure can give rise to a capital allowance, which reduces the taxable profit or income on which tax is calculated.

But there is an important compliance point businesses should understand in 2026: not every asset purchase automatically qualifies for capital allowance.

The Nigeria Tax Act, 2025, which took effect on 1 January 2026, sets conditions for capital allowance claims. For an asset to qualify, the expenditure must meet the requirements in the First Schedule, including being incurred for the taxpayer’s trade or business and the asset being owned and used for that trade or business at the end of the relevant basis period.

Where VAT becomes important

One of the changes under the new framework is the treatment of VAT and import duties on qualifying assets.

Section 27 of the Nigeria Tax Act provides that where VAT is due on an asset but was not charged, or where an imported asset should have attracted import duty or levy that was not paid, the expenditure is not treated as qualifying capital expenditure for the capital allowance deduction.

For example, imagine a Nigerian digital agency buys equipment for ₦10 million for its business. If the purchase meets the other requirements for qualifying capital expenditure, the agency may be able to claim the applicable capital allowance.

However, if VAT was legally due on that asset and was not charged, the expenditure may fail the qualifying capital expenditure test. That means the business cannot simply assume that the entire ₦10 million purchase will generate a capital allowance.

This makes the tax treatment of the underlying asset purchase important, not just the amount paid.

What about failing to file tax or VAT returns?

This is where an important distinction needs to be made.

The Nigeria Tax Administration Act, 2025 requires taxable persons to file the relevant tax returns. For VAT, businesses that are required to file must generally submit their returns by the 21st day of the following month, although the Act provides an exemption for small businesses unless they choose to opt into the VAT regime.

Failure to file returns can attract administrative penalties. Under section 101 of the Nigeria Tax Administration Act, 2025, failure to file or knowingly filing incomplete or inaccurate returns attracts a penalty of ₦100,000 for the first month and ₦50,000 for each subsequent month that the failure continues.

However, the current legislation does not simply say that missing a general tax return or VAT return automatically cancels all capital allowances.

The more direct capital allowance restriction is tied to whether the expenditure qualifies under the Nigeria Tax Act. For example, VAT that was due on an asset but was not charged can prevent that expenditure from qualifying.

So businesses should avoid treating every compliance problem as though it has the same tax consequence. A late return can create penalties and other compliance issues, while an improperly treated asset purchase can affect whether capital allowance is available on that asset.

What does this mean for a freelancer or freelance agency?

It can matter.

A freelancer operating as an individual can have capital allowance included among the deductions used to determine total income under section 28 of the Nigeria Tax Act. The First Schedule also applies its capital allowance rules to trades, businesses, professions and vocations.

Consider a freelance video producer who buys professional cameras and editing equipment for the business. Or a software development agency that purchases computers and qualifying software used to generate its income.

These are different from ordinary business expenses because they are assets that may fall within the capital allowance framework.

The freelancer or agency therefore needs to keep evidence showing what was purchased, who purchased it, how it was paid for, what the asset cost, and how it is used in the business. Where VAT or import duties apply, the relevant documentation also matters.

For a freelance agency operating as a company, the same capital allowance framework applies when determining the company’s taxable profits. The Act provides different capital allowance rates depending on the class of qualifying capital expenditure, including 10%, 20% and 25% categories.

Keep the evidence behind the claim

Capital allowance is not simply about having an expensive asset on your balance sheet.

The tax records should tell the story behind the claim.

If your agency buys a computer, camera, vehicle or qualifying software, keep the invoice, payment evidence and relevant tax documentation. If the asset was imported, retain the documents showing the applicable import duties or levies. Keep records showing that the asset belongs to the business and is being used for the business.

This also makes your tax return easier to support if the tax authority asks questions later.

The Nigeria Tax Administration Act requires businesses and other taxable persons to maintain books and records that allow the correct assessment of tax and filing of returns.

For freelancers and small agencies, good records are therefore useful beyond filing season. They help connect your income, expenses, assets and tax claims into one consistent financial record.

LessaTax helps freelancers and businesses keep these financial records organised throughout the year, so important documents and transaction details are easier to find when it is time to prepare and support your tax position.

This article explains the general framework under Nigeria’s tax laws effective from 2026. The tax treatment of a particular asset can depend on the nature of the asset, the taxpayer and the transaction.