What is a basis period?

Definition of a basis period

A basis period is the time period for which a sole trader or partnership pays tax each year.

Usually your business's basis period will be the same as its accounting year.

In the early years of your business's life, if you are not preparing accounts to match the tax year, you will have to work out your profit for basis periods that don't match your accounting year, and include those on your tax returns.

This often results in you having to pay tax twice on the same profits - but you will have this tax refunded if your business ceases to trade or changes its accounting year end.

If you change your business's accounting year end, or when your business stops trading, then you will also have to check the basis period rules.

Basis period example:

A business starts trading on 1st January and decides to prepare accounts to 31st December each year.

  • Its first basis period will be 1st January - 5th April, because the first basis period always ends on the tax year end.
  • Its next basis period will be 1st January - 31st December of the same year, because as the first accounting year is 12 months long, the basis period ends on the same date as the accounting year.
  • Its next basis period will be 1st January - 31st December of the following year, and so on.

The profits made in the period 1st January - 5th April will be taxed in both the January - April and the January - December basis periods during the first accounting year.

Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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