Enhanced capital allowances will allow companies to offset 100% of their investment in low emission cars during the first year of ownership.
The scheme, effective immediately, applies to all new cars with CO2 emissions below 120g/km, and to electric cars and will be in force until March 31, 2008. Models which meet this criterion include Ford's Fiesta, the Renault Clio, Smart, Toyota Prius, Toyota Yaris, Honda Insight, Audi A2 and Peugeot 206.
Capital allowances mean the cost of capital assets can be written off against the taxable profits of a business. They are given in lieu of depreciation charged in the accounts, which is not allowed for tax purposes.
The new rules also mean that for companies leasing vehicles, the traditional £12,000 expensive car disallowance will also be removed, so the entire rental cost can be offset against taxable profits.
The incentive also applies to the cost of equipment for refuelling vehicles, such as on-site tanks, for 'green' fuels like natural gas or hydrogen, but not LPG.
However, John Lewis, director general of the British Vehicle Rental and Leasing Association, claimed the move was 'academic' as the choice of vehicles that meet the new requirements is limited for fleets.
He did, however, welcome the potential to boost investment in low emission hybrid cars.
Jon Walden, managing director of Lex Vehicle Leasing, said: 'There are about 15 models company car drivers could choose from.
'It can't have a massive impact, but we would welcome the Chancellor of the Exchequer extending the scheme next year.'
ING Car Lease estimates the accelerated capital allowances will save fleets about £1.50 a month per leased vehicle.