Research and development remains a deductible expense under the Nigeria Tax Act 2025, but the basis for calculating the maximum allowable claim has undergone a fundamental shift. Section 165 of the new legislation preserves the R&D deduction, yet subsection (2) now limits the relief to 5 percent of a company's gross turnover for the year, replacing the previous benchmark of 10 percent of total profits.
Under the former Companies Income Tax Act, the deduction ceiling was anchored to total profits—defined as what remains after business costs are subtracted. The new framework ties the cap instead to turnover, which the Act describes broadly as the inflow from sales, services, interest, rents, royalties, dividends, and similar operating receipts. The distinction is significant because a profits-based limit rises and falls with margins, while a turnover-based limit is tied purely to the scale of revenue.
This structural change produces uneven outcomes across sectors. A firm with robust sales but thin margins may find the new cap more restrictive than the old one, even if its R&D expenditure is substantial. Conversely, a low-margin business with high turnover could, in some scenarios, claim a larger deduction than before.
Two numerical examples illustrate the divergence. Consider a company with turnover of ₦1 billion, total profits of ₦400 million, and R&D spending of ₦80 million. Under the previous rule, 10 percent of total profits yielded a cap of ₦40 million. The new rule, applying 5 percent to turnover, produces a cap of ₦50 million—a higher allowable deduction, provided the spending is qualifying.
Now take a second company with the same ₦1 billion turnover and ₦80 million in R&D costs, but total profits of ₦700 million. The old cap of 10 percent of profits would have been ₦70 million. The new 5 percent of turnover cap remains ₦50 million, trimming the available deduction by ₦20 million. The effect hinges entirely on the relationship between revenue and profitability.
The impact varies by sector. Early-stage startups, which typically generate low turnover, may find the 5 percent ceiling modest in absolute naira terms. Technology firms with high sales and heavy product development expenditure could hit the cap more quickly than smaller software houses with lower revenues. Manufacturers and pharmaceutical companies, which often run structured R&D programmes, may also feel the limitation acutely where their spending outstrips 5 percent of turnover.
