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EFFECT OF CAPITAL ALLOWANCES ON THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES (CASE STUDY: SELECTED CONSTRUCTION COMPANIES IN NIGERIA)
Abstract
This thesis examines the effect of capital allowances on the performance of small and medium scale enterprises (SMEs) in Nigeria, with a specific focus on selected construction companies. Capital allowances, as tax incentives provided under Nigerian tax laws, allow businesses to deduct the cost of qualifying capital expenditures from their taxable income, thereby reducing tax liabilities and potentially enhancing cash flow, investment, and overall performance. The study adopts a mixed-methods approach, combining quantitative data from financial statements and surveys with qualitative insights from interviews. Key findings indicate that effective utilization of capital allowances significantly improves profitability, asset acquisition, and growth among SMEs in the construction sector, though challenges such as low awareness, complex claiming processes, and implementation barriers persist. The research contributes to policy recommendations for enhancing tax incentive frameworks to support SME development in Nigeria. Recommendations include simplifying administrative procedures and increasing awareness programs for SMEs.
Keywords: Capital allowances, SMEs, performance, construction companies, Nigeria, tax incentives.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Small and medium scale enterprises (SMEs) are indispensable to Nigeria’s economic framework, serving as primary drivers of employment, innovation, and economic diversification. These enterprises employ over 84% of the workforce and contribute approximately 48% to the national gross domestic product (GDP), making them a cornerstone for grassroots economic health and poverty alleviation (Akan et al., 2023). In particular, within the construction sector, SMEs play a crucial role in bridging infrastructure gaps, alleviating housing shortages, and facilitating urban development in the face of Nigeria’s burgeoning population, which is projected to reach 400 million by 2050. The sector’s growth is evidenced by a 5.6% year-on-year increase in value-add during the third quarter of 2025, underscoring its potential for economic stimulus (GlobalData, 2025). Nevertheless, SMEs in this domain frequently encounter formidable financial obstacles, such as soaring operational expenses, constrained financing options, and onerous tax responsibilities, all of which can stifle their expansion, operational viability, and long-term sustainability.
Capital allowances, as delineated in the Companies Income Tax Act (CITA) and ancillary fiscal regulations, represent a vital tax relief instrument intended to incentivize investments in fixed assets critical to construction operations, including machinery, vehicles, buildings, and specialized equipment like excavators and scaffolding. These allowances facilitate accelerated depreciation write-offs, thereby diminishing taxable profits and liberating cash flows for reinvestment into core business activities, such as project execution and workforce development. Empirical investigations have illuminated a robust positive association between tax planning mechanisms, encompassing the strategic use of capital allowances, and the organizational advancement of SMEs in Nigeria. Notably, proficient application of capital allowances has been demonstrated to favorably affect revenue escalation and profitability metrics, enabling SMEs to navigate competitive landscapes more effectively (Chukwu et al., 2025).
In recent years, the Nigerian government has enacted progressive reforms to fortify SME resilience, including revisions to tax legislation that streamline capital allowance claims and institute exemptions for microenterprises generating turnovers below ₦100 million. These measures are part of a broader 2026 tax regime overhaul aimed at bolstering fiscal equity and compliance while elevating the tax-to-GDP ratio (Udoh, 2025). However, despite these advancements, pervasive underutilization plagues construction SMEs, attributable to deficiencies in awareness, administrative intricacies, and erratic policy application. The construction industry, inherently capital-intensive with substantial outlays for heavy machinery and raw materials, stands to gain immensely from optimized capital allowances, which can substantially elevate competitiveness, streamline operational processes, and expedite project timelines. For instance, government allocations in the 2024 budget included ₦922.2 million for road construction and ₦166.4 million for affordable housing, creating opportunities for SME involvement through public-private partnerships (U.S. International Trade Administration, 2025).
Academic discourse has further elucidated that capital allowance incentives empower SMEs to tactically alleviate tax burdens, fostering augmented cash reserves and fortified financial robustness. This is particularly pertinent in mitigating the adverse effects of high capital costs and volatile tax tariffs, which often exacerbate funding dilemmas and operational inefficiencies (Adedipe, 2025). Moreover, in the expansive vista of SME endurance, elements such as elevated maintenance expenditures, suboptimal managerial acumen, and fierce competition from international entities compound these challenges; yet, tailored incentives like capital allowances offer a palliative by enhancing investment capacities and promoting sustainability (Akan et al., 2023). This investigation hones in on selected construction firms in Nigeria to meticulously unravel the nuanced influences of capital allowances on performance indicators, thereby addressing a lacuna in sector-tailored scholarly inquiries and contributing to a more granular understanding of fiscal policy efficacy.
1.2 Statement of the Problem
Despite the established provision of capital allowances as a fiscal mechanism to support SMEs, many enterprises within Nigeria’s construction sector continue to demonstrate suboptimal performance, marked by reduced profitability, high failure rates where numerous businesses collapse within their first five years, and limited scalability (Akan et al., 2023). A critical issue is the persistent underutilization of these incentives; empirical studies indicate that a significant proportion of SMEs, often exceeding 50%, remain unaware of capital allowance provisions or face substantial obstacles in accessing them (Yusuf & Ojo, 2025).
Operational challenges, including complex documentation requirements, prolonged approval processes by tax authorities, and mandatory compliance with digital filing under the Nigeria Tax Administration Act (NTAA), disproportionately burden construction firms operating on thin margins. These challenges are exacerbated in an industry where capital expenditures on essential assets such as excavators, scaffolding, and building materials constitute a major portion of costs. Ineffective utilization of allowances leads to higher tax liabilities, reduced reinvestment capacity, and increased vulnerability to macroeconomic instabilities, including inflation and supply chain disruptions (Udoh, 2025).
The gap between policy objectives and practical realities undermines the effectiveness of capital allowances in fostering SME growth. Recent research highlights that, despite the positive relationship between capital allowances and SME sustainability and financial health, persistent issues such as low awareness, institutional weaknesses, and regressive indirect taxes limit their impact (Adedipe, 2025; Chukwu et al., 2025). Further compounding these challenges are systemic deficiencies, including inadequate infrastructure financing despite government initiatives like the 30-year National Integrated Infrastructure Master Plan, and competitive pressures that threaten SME survival in the construction sector (U.S. International Trade Administration, 2025). This study examines these challenges among selected Nigerian construction firms, aiming to propose actionable solutions that align policy intentions with operational realities.
1.3 Objectives of the Study
The primary objective is to investigate the effect of capital allowances on the performance of small and medium scale enterprises in Nigeria, focusing on selected construction companies as a case study.
Specific objectives include:
- To identify the types of capital allowances accessible to SMEs in the Nigerian construction sector.
- To evaluate the awareness and utilization levels of capital allowances among these SMEs.
- To examine the influence of capital allowances on critical performance indicators, including profitability, growth, and liquidity.
1.4 Research Questions
This study is guided by the following questions:
- What types of capital allowances are available to SMEs in the Nigerian construction sector?
- What is the extent of awareness and utilization of capital allowances among selected construction companies?
- In what ways do capital allowances impact the profitability, growth, and liquidity of these SMEs?
1.5 Research Hypotheses
The following null hypotheses will be tested:
H01: There is no significant relationship between capital allowances and the profitability of SMEs in the construction sector.
H02: Capital allowances do not significantly affect the growth and liquidity of selected construction companies in Nigeria.
H03: Awareness levels of capital allowances have no bearing on their utilization and overall SME performance.
1.6 Significance of the Study
This research holds substantial value for multiple stakeholders. Policymakers may utilize the findings to refine tax incentive frameworks, potentially stimulating economic growth, employment generation, and infrastructure advancement in Nigeria. For SME owners within the construction sector, increased awareness of capital allowances could lead to improved financial planning, reduced fiscal liabilities, and greater operational sustainability.
From an academic perspective, the study contributes to the existing body of literature on fiscal policy and SME dynamics in emerging economies, providing a construction-sector-specific analysis that may inform subsequent research. Tax consultants and financial advisors could apply these insights to assist SMEs in optimizing taxation strategies, aligning with Nigeria’s Sustainable Development Goals by strengthening enterprise resilience. Empirical evidence suggests that tax incentives, particularly capital allowances, enhance firm growth and financial performance when administrative accessibility is improved.
1.7 Scope of the Study
This investigation is limited to registered small and medium-scale construction enterprises operating under the Corporate Affairs Commission (CAC) in Nigeria. Geographically, the study focuses on major economic hubs, including Lagos, Abuja, and Port Harcourt, to account for regional operational variations. Temporally, the research covers the period from 2020 to 2025, capturing recent policy developments and economic influences, including post-pandemic recovery trends.
Thematically, the analysis concentrates on capital allowances under the Companies Income Tax Act (CITA), with supplementary consideration of related incentives such as tax holidays where contextually relevant, while excluding unrelated fiscal mechanisms.
1.8 Limitation of the Study
Potential limitations include reliance on self-reported survey data, which may introduce response biases. Restricted access to proprietary SME financial records could constrain the depth of available data. Although the sample is representative of selected firms, broader applicability to all Nigerian construction SMEs may be limited. External economic variables, such as inflationary trends or legislative amendments (e.g., the 2026 tax reforms), could influence outcomes.
Despite these constraints, the study employs rigorous mixed-methodological approaches and statistical validations to enhance analytical robustness and reliability.
1.9 Definition of Terms
- Capital Allowances: Tax deductions on qualifying capital expenditures to offset taxable income, per Nigerian tax regulations.
- Small and Medium Scale Enterprises (SMEs): Entities with assets (excluding land/buildings) ranging from ₦5 million to ₦500 million and 10-199 employees, as per the Central Bank of Nigeria.
- Performance: Assessed via metrics like profitability (return on assets), growth (revenue expansion), and liquidity (current ratio).
- Construction Companies: Businesses involved in building, civil engineering, and infrastructure projects in Nigeria.
References
Adedipe, O. A. (2025). Role of tax incentives in promoting entrepreneurial development: A study of SMEs in Lagos, Nigeria. Malete Journal of Accounting and Finance, 5(2), 168-181. https://majaf.com.ng/index.php/majaf/article/view/228
Akan, D. C., Sinebe, M. T., & Bereprebofa, D. (2023). Capital cost and sustainability of small and medium-scale enterprises (SMEs) in Nigeria. International Journal of Social Science & Humanities Research, 6(11), 13-24. https://www.researchgate.net/publication/375689083_CAPITAL_COST_AND_SUSTAINABILITY_OF_SMALL_AND_MEDIUM-SCALE_ENTERPRISES_SMEs_IN_NIGERIA
Chukwu, O., Udoh, I. I., Womuru, O. B. N., & Nwiduuduu, V. G. (2025). Tax planning strategies and organizational growth of small and medium term enterprises (SMES) in Nigeria. Journal of Accounting and Financial Management, 11(12), 531-551. https://iiardjournals.org/abstract.php?id=64201&j=JAFM&pn=Tax+Planning+Strategies+and+Organizational+Growth+of+Small+and+Medium+Term+Enterprises+%28SMES%29+in+Nigeria
Oyedokun, G. E. (2025). Capital allowance incentives, tax holiday incentives and continuity of small and medium scale enterprise in Nigeria. International Journal of Accounting Finance and Social Science Research. https://www.academia.edu/129594087/Capital_Allowance_Incentives_Tax_Holiday_Incentives_And_continuity_of_Small_and_Medium_Scale_Enterprise_in_Nigeria
Udoh, U. G. (2025). Analysis of Nigeria’s 2026 tax regime: Anticipated impact on SMEs and low-income households. SSRN. https://ssrn.com/abstract=5991174