A basis period is a term used primarily for self-employed individuals and partnerships to determine the period for which the taxable profits of a business are assessed for income tax purposes. The basis period usually aligns with the tax year, which runs from April 6th to April 5th. However, for businesses with accounting periods that don’t align with the tax year, the basis period rules determine which profits are taxable in a particular tax year.

Changing the basis period:

The basis period can be changed in the following situations:

1. Starting a new business: In the first tax year of a new business, the basis period begins on the day the business starts and ends on the following April 5th. From the second tax year onwards, the basis period generally aligns with the business’s accounting period.
2. Changing the accounting period: The basis period will be affected if a business changes its accounting period. For example, if a business changes its accounting period from December 31st to March 31st, the basis period will be adjusted accordingly. This may result in an overlap of profits being taxed in two different tax years or a gap between the periods for which profits are taxed. In such cases, special rules prevent double taxation or under-assessment of tax liabilities.
3. Cessation of the business: If a business ceases trading, the basis period for the final tax year will run from the end of the previous basis period until the date the business ceases trading.

Special guidelines about the basis period:

1. Overlap relief: If the basis period changes due to the business changing its accounting period, there may be an overlap in the profits assessed for tax purposes. Overlap relief can be claimed in such cases, which can be used to reduce the taxable profits when the business ceases trading or when the accounting period is changed again.
2. The gap between basis periods: If there’s a gap between basis periods (i.e., a period for which no profits are assessed for tax purposes), the business must notify HMRC. In such cases, HMRC may issue a direction to ensure the profits are fairly assessed for tax purposes.
3. Short accounting period: If a business has a short accounting period (less than 12 months), the taxable profits will be based on the actual profits earned during that short accounting period.
4. Long accounting period: If a business has a long accounting period (more than 12 months), the profits must be apportioned to determine the taxable profits for each tax year. The business must prepare accounts for each tax year and apportion the profits accordingly.

Understanding the basis period rules and how they apply to your situation is essential to ensure you accurately report your taxable profits to HMRC. In case of any confusion, consulting a tax professional for guidance is always advisable.