Basis periods – the general rules

A basis period is the time period for which the self-employed or partnerships pay tax in each tax year. The general rule is that the profits for a tax year are those arising in the period of 12 months ending with the accounting date in that year. The use of basis periods ensure that taxable profits are allocated to the correct accounting period. The general rule will always apply to a continuing trade using the same accounting date each year from Year 3 onwards.

However, different rules apply under the following circumstances:

  • For the early years after trading commenced;
  • For a year in which there is no accounting date;
  • For the year of cessation;
  • Where there is a change of accounting date.

These rules ensure that there are no gaps in the periods for which profit is taxed (the basis period for the tax year) but there may be overlaps. The issue of overlap profits can happen in the first 2 or 3 years of the business or in any year in which there is a change of basis period due to a change of accounting date. Overlap relief is a mandatory deduction and can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period subsequently changes.

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