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On 10th November 2021, the Federal Inland Revenue Service (FIRS) issued a fresh Information Circular on Extension of the Meaning of “In Use”1 (“the Circular”). The Circular was issued to provide clarification and guidelines on the application of Paragraph 16 of the Second Schedule to the Companies Income Tax Act (CITA)2 as it pertains to the meaning of the term “in use” for claims of Capital Allowance (CA). The Circular specifies requirements for granting CA on an asset during a period of “temporary disuse” and when an asset is a “capital work-in-progress”.
As a background, paragraph 16 (1) & (2) of the Second Schedule to CITA allows a company to claim CA on either an asset in a state of temporary disuse or on an asset which is yet to be used but whose first use will be for the purpose of the trade or business, subject to the approval of the FIRS.3 Capital Allowance is a claim for tax relief by companies against assessable profits when computing their tax liabilities. It is granted to companies that prove that they have incurred qualifying capital expenditure (QCE) for the purpose of a trade or business to generate taxable income in line with the Second Schedule to CITA.4
Depreciation is a financial accounting term that describes a means of spreading the total cost of an asset used up in an accounting period.5 Depreciation suggests disuniformity of tax rules because there are different methods of calculating it. Thus, making depreciation an allowable expense would feature a disuniform, imbalanced, and chaotic corporate tax environment with different depreciation values for different corporates on similar assets due to dependence on different styles of calculating depreciation. Expectedly then, under Nigerian tax law, it is not an allowable expense; it is not considered as part of a company's taxable profit.
To compensate corporate taxpayers for the use of assets to make profits, CA was introduced in lieu of depreciation, to ensure uniformity and consistency, characterized by standardized statutory rates applicable to all corporate taxpayers.
This article provides key highlights on the Circular especially as it pertains to assets in temporary disuse and assets under the ambit of capital work-in-progress.
Definitions
Claiming CA on Assets under CWIP
The following conditions must be satisfied before a company can claim CA on CWIP:
Furthermore, paragraph 16(2)(a) of the Second Schedule to CITA provides as follows:
“An asset in respect of which qualifying expenditure has been incurred by the company owning such asset for the purposes of a trade or business carried on by it shall be deemed to be in use, for the purposes of that trade or business, between the dates hereinafter mentioned, where the Service (FIRS) is of the opinion that the first use to which the asset will be put by the company incurring such expenditure will be for the purposes of that trade or business.7
In line with the discretion granted by CITA (as amended) to the FIRS in the above-excerpted provision, the following conditions must be fulfilled by an applicant company:
Therefore, where capital expenditure has been incurred on an asset which has not been used in generating taxable income for a relevant trade or business, such asset will not qualify as a QCE for CA purposes.9
Conversely, where capital expenditure has been incurred on an asset that is partially completed, and the completed part of that asset has been used in generating taxable income for a trade or business, such capital expenditure will be allowed as CA on the cost incurred to-date and will relate only to non-exempt income.10
Claiming CA on Assets in Temporary Disuse
Recall that IA is claimable on every QCE.11 Further, a company may claim AA on the TWDV of the asset during the period of temporary disuse.12
The issuance of the Circular to refine the process and eligibility criteria for claiming CA is laudable. Previously, periods of temporary disuse of an asset are ignored in computing CA, despite the likelihood that such asset might have been deployed towards creating taxable income. The issuance of the Circular is in line with the rationale behind the introduction of CA in lieu of depreciation in the first place, which is to properly compensate taxpayers for efficiently using acquired assets to produce taxable income and ultimately boost government revenue.
Footnotes
1 No. 2021/20, available here: <https://www.firs.gov.ng/wp-content/uploads/2021/11/INFORMATION-CIRCULAR-ON-EXTENSION-OF-THE-MEANING-OF-IN-USE.pdf>, last accessed 15th December 2021 at 10:17 am.
2 As amended by Section 22 of the Finance Act 2020 (“FA20”).
3 Paragraph 16(1) of the Second Schedule to CITA extends the scope of the clause “in use” with respect to CA and a company's assets – that an asset is deemed to be “in use” during a period of temporary disuse.
4 Supra.
5 Assets are usually acquired by corporates to facilitate production and create profits. When assets are acquired but cannot be used up during one accounting period, it is impossible to write off the total cost of such asset over one accounting period. Instead, the cost is gradually spread across all accounting periods that “benefit” from the use of the asset. These accounting periods constitute the useful life of the asset.
6 Paragraph 6.0 of the Circular.
7 Emphasis mine.
8 Paragraph 5.0 of the Circular.
9 Paragraph 7.0(i) of the Circular.
10 Paragraph 7.0(ii) of the Circular.
11 Page 2, infra.
12 Paragraph 7.0(iii) of the Circular. See also, Table II of the Second Schedule to CITA (as amended).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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