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.
Section 165(3) introduces an additional compliance point: if a company subsequently sells or transfers the outcome of its R&D for commercial use, the proceeds become taxable under the Act. This means businesses must track not only current deductions but also the future tax implications of monetising developed intellectual property.
Although the Act does not spell out the policy rationale within Section 165 itself, the pivot from a profit-based to a turnover-based ceiling points towards several fiscal objectives—broadening the tax base, improving revenue predictability, and standardising the incentive framework while keeping innovation support within a tighter boundary.
Businesses should respond by reviewing R&D budgets against the new 5 percent turnover cap, discarding assumptions tied to the old profit-based limit. Finance teams ought to build the revised ceiling into forecasts so that projected tax savings are not overstated in budgets or investor presentations. Keeping rigorous records of qualifying R&D expenditure and engaging tax advisers early—particularly for large projects or where R&D outputs may later be licensed or sold—has become essential.
The Nigeria Tax Act 2025 has not withdrawn the R&D deduction, but it has recalibrated it meaningfully. For companies that invest in innovation, the directive is straightforward: continue spending on development, but plan the tax position around a different limit. In this new regime, disciplined compliance and accurate forecasting carry as much weight as the innovation itself.
