Still on Certificate of Acceptance and eligibility to claim capital allowances

Businesses incur various expenses for business purposes including operating expenses such as salaries, rent and electricity as well as capital expenditure such as building, plant & machinery, motor vehicles, and small equipment such as laptops, phones, etc. While operating expenses can be deducted in full for tax purposes in the relevant tax year, tax deduction for capital expenditure is granted by way of capital allowances over a period longer than one year. To obtain a tax deduction for any expense, the taxpayer must provide adequate evidence that the cost was incurred in the relevant period and for the purpose of the business.

• Section 2 of the Industrial Inspectorate Act (IIA) enacted in 1970 requires the Inspectorate Division of the Federal Ministry of Industries to determine the investment valuation of any new or existing undertaking i.e. capital employed, valuation of buildings, plants and other machinery. This is to enable the Division to obtain necessary information on economic trends in the country.
• Section 3 of the IIA mandates any person proposing to start a new undertaking involving the expenditure of not less than N20,000 (subsequently amended to N500,000) or additional capital expenditure in respect of an existing undertaking, to notify the Division which shall verify the expenditure and if satisfied issue and forward to the company a certificate of acceptance.
• Section 4 requires any dispute regarding the valuation of investment stated in the certificate of acceptance to be resolved through arbitration while section 5 mandates the FIRS, Customs, Immigration, Prisons Service and any department of government (federal and state) to accept without disputing the value stated in the certificate where it is required in the exercise of such agencies’ functions under any law.
• Section 11 defines an “undertaking” as trade or business involved in the production of goods or services for sale that requires the use of industrial machinery and other equipment, plants, buildings and other permanent or temporary fixtures on land.
• The second schedule of the Companies Income Tax Act (CITA) specifies the eligibility conditions for capital allowances including ownership of the asset; usage for purposes of the business at the end of the relevant period; and a claim for the allowance to be made by the company. Neither CITA nor the FIRS Establishment Act mentions certificate of acceptance as a condition for capital allowance.

Implications:

1. Certificate of acceptance is only required for industrial machinery and other equipment, plants, buildings and fixtures on land, where the value is at least N500,000
2. The primary objective is to provide necessary information to the government on economic trends in the country
3. Certificate of Acceptance is not a condition for the claim of capital allowance. Penalty for failure to obtain the certificate, where applicable, is a fine on conviction as prescribed under section 3(4) of the IIA.
4. If a taxpayer presents a certificate of acceptance as evidence of its assets, the FIRS is bound to accept the value without question
5. FIRS may request for the certificate as part of evidence to determine the value of any assets specified under the IIA. Where the certificate is not provided, it is within the powers of the FIRS to refuse to grant capital allowance unless the taxpayer is otherwise able to substantiate the value and ownership of the asset as stipulated under the second schedule of CITA.

Conclusion:

Certificate of acceptance is no longer relevant in achieving the objective for which it was designed in 1970. The requirement should therefore be expunged from the law. In the meantime, FIRS may request for the certificate as corroborative evidence of the value of relevant assets but not solely as the basis for granting capital allowance on such qualifying capital expenditure.