Introduction Background
8.Capital allowances allow the cost of capital assets to be written off against taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax. Most businesses are entitled to an annual 100 per cent allowance, the Annual Investment Allowance (AIA), for their investment in most plant and machinery (excluding cars) up to an annual limit of £25,000. For expenditure above that limit, writing-down allowances (WDA) are available, which are given at the main rate of 18 per cent or the special rate of eight per cent per annum.
9.FYAs, currently available at a rate of 100 per cent, are available for expenditure on certain types of plant or machinery as an alternative to AIA and WDA.
10.Whilst cars are plant and machinery, there are special capital allowances rules that only apply to expenditure incurred on cars.
	Expenditure on electric cars or cars with very low CO emissions (up to 95g/km driven from 1 April 2013) qualify for 100 per cent FYAs. This allowance aims to encourage investment in cleaner cars by providing a tax incentive for businesses to invest in those cars with the lowest CO emissions. It is complemented by wider measures including 100 per cent FYA for expenditure incurred on natural gas and hydrogen refuelling equipment which is also being extended to 31 March 2015.
	Following the changes made by this section, expenditure on ‘main rate cars’ (those with CO emissions over the 95g/km threshold for FYA but no more than 130g/km) will be allocated to the main rate pool and qualify for 18 per cent writing down allowances on the reducing balance of expenditure.
	Expenditure on cars with CO emissions exceeding 130 g/km will be allocated to the special rate pool and qualify for eight per cent writing down allowances on the reducing balance of expenditure.
11.In addition, whilst expenditure on the provision of plant or machinery for leasing has been, and continues to be, excluded from being first-year qualifying expenditure this exclusion has not applied to cars with low emissions. This section aligns the treatment of low emission cars with all other plant and machinery provided for leasing.
12.Some businesses hire or lease their cars rather than buy them. There are rules that restrict the tax deduction for hire expenses where the car has emissions equivalent to those that would be allocated to the special rate pool. This “lease rental restriction” reduces the amount of the rental payments that would otherwise be allowed in calculating a business’s taxable profits by a flat rate disallowance of 15 per cent. For leases commencing on or after 1 April (corporation tax) or 6 April 2013 (income tax) the lease rental restriction will apply to cars over the 130g/km threshold.