Which business expenses are deductible in Nigeria?
The test a Nigerian business expense must pass to be deductible for income tax, the VAT condition that catches many, and the records each deduction needs.
By Achekam · · 5 min read · For Running a business businesses in Nigeria
Every business owner wants the tax bill to reflect what the business really earned, after the rent, the salaries, the diesel and the hundred small costs of staying open. Deductible expenses are how that happens. But the Nigeria Revenue Service (NRS) does not accept every naira that left the bank account as a business cost, and the 2025 tax laws added a condition that catches many businesses by surprise.
This article sets out the test an expense must pass, the VAT rule that can disqualify an otherwise ordinary cost, the anti-avoidance rules behind it all, and how to keep records that let each deduction stand.
Wholly, reasonably, exclusively and necessarily
The NRS says business expenses are allowable for relief when they are wholly, reasonably, exclusively and necessarily incurred in the course of business operations, subject to limits in the law. Each word does work:
- Wholly: the whole expense relates to the business, not part of it.
- Reasonably: the amount is sensible for what was bought. Paying a relative's company several times the going rate for cleaning fails here even if the cleaning happened.
- Exclusively: the expense is for the business alone. A car used for the school run and for deliveries is the classic problem.
- Necessarily: the cost was incurred to run the business, in the course of its operations.
The test sits on the NRS's tax incentives page, which also covers the main reliefs, including allowable expenses, capital allowances and loss relief, and the duty to file annual tax incentive returns.
A worked example in words. A trading company pays rent on its warehouse, the director's household electricity bill, and a lavish end-of-year party for its biggest customer's staff. The warehouse rent passes easily. The household bill is not a business cost at all. The party is a question of reasonableness and purpose, and the company should be ready to explain it.
The VAT condition: no VAT paid, no deduction
Under the Nigeria Tax Act, 2025, section 21(p), an expense on which VAT was due but not charged is not deductible for income tax. PwC's summary of Nigerian taxes describes the rule the same way from the other side: expenses are deductible, and capital allowances are claimable on qualifying assets, only where VAT and any applicable import duty have been paid.
This is the condition most likely to cost an ordinary business money. A supplier who should have charged VAT but issued an invoice without it, perhaps because it never registered, has just made your expense non-deductible. So has an import that slipped through without the duty being paid.
The practical defence is at the point of purchase. When a regular supplier should be charging VAT and is not, ask why, and get a proper VAT invoice. Where the supplier is genuinely exempt or below the registration threshold, keep a note of that, because VAT was then not "due" in the first place.
Substance over form
The NRS says the Nigeria Tax Act includes general anti-avoidance and substance-over-form rules, with powers to disregard artificial or fictitious arrangements. In plain terms: calling something a business expense does not make it one. A "consultancy fee" paid to a shareholder's relative for no work, a "management charge" that moves profit to a related company with nothing behind it, or a chain of paper transactions with no commercial purpose can all be set aside.
The safest test is to ask whether you would pay the same amount to a stranger for the same thing, and whether you could show what you got for it.
The records behind every deduction
The NRS says that to qualify for tax reliefs a taxpayer must keep proper books and records, file accurate and timely returns, and submit the supporting documents the NRS requires. An expense with no invoice, no contract and no evidence of payment is hard to defend, however genuine it was.
For each significant expense, keep:
- The supplier's invoice, showing the VAT charged where it was due.
- Evidence of payment, such as the bank line or transfer receipt.
- The purpose, if it is not obvious: a contract, purchase order or short note.
- For imports, the duty and VAT payment documents.
How long to keep them is covered in record keeping for six years.
Capturing bills and receipts in Achekam
Good records begin with how costs enter the books. Each business in Achekam has its own double-entry ledger with a standard chart of accounts created when the books first open, and accounts can be added, renamed or switched off. That lets you keep costs that are often questioned, such as entertainment, travel or related-party fees, in their own accounts where they are easy to review.
A business records supplier bills line by line with VAT, and a bill without a purchase order waits for approval before it posts. Because VAT is captured on each line, a bill on which VAT was due but not charged shows up as one with no VAT, which is exactly what you want to notice.
Supplier invoices and receipts uploaded to Financial Intake become suggested postings. AI can suggest the account, but only a person approves and posts. That human step is where someone should ask the four questions: wholly, reasonably, exclusively, necessarily.
A year-end review of expense accounts
Before the accounts go to your accountant for the tax computation, walk through the expense accounts with these questions:
- Private costs: anything that benefits an owner or family member rather than the business?
- Mixed-use costs: vehicles, phones or premises used partly for private purposes, with no split made?
- Missing VAT: purchases from suppliers who should have charged VAT and did not?
- Unpaid duty: imported goods without duty and import VAT evidence?
- Related parties: fees to shareholders, directors or their companies, at a price a stranger would pay?
- Paperwork: large expenses with no invoice or contract on file?
Anything that fails one of these is better removed or adjusted by you than disallowed by the NRS. The rates and the rest of the company tax picture are in company income tax from 2026.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
