EXPLAINING THE PREVIOUS BASIS PERIOD MORE

What Is the Basis Period in Income Tax?
Before we delve into the recent changes, let's understand what the "basis period" means in income tax. In the UK, self-employed individuals and businesses typically report their income and pay taxes annually. The basis period is the period used to calculate taxable profits for the year.

Current Continuing Businesses
Businesses usually compile their financial records for a 12-month period, ending on a specific date each year known as their "accounting date" (note that this date can vary from company to company). Before the recent change, a business's profit or loss for a tax year is typically calculated based on its financial performance during the period leading up to its accounting date that falls within a particular tax year. It is this profit or loss after adjustments that would be included in the returns filed for that tax year (A tax year runs from 6th April to 5th April the following year). This  accounting 12-month period, for tax purposes, was the "basis period."   

To explain the basis period more, Imagine you run a small business, and your accounting year usually aligns with the calendar year, running from January 1st to December 31st each year. This means your accounting date is December 31st. For a business that has been in operation for more than a year, the profit or loss after adjustments for its accounting year beginning on 1st January 2022 and ending on 31st December 2022 for instance would be included in its returns for the  2022/2023 tax year, as December 31st, 2022 falls within that tax year (2022/2023 tax year runs from 6th April, 2022 to 5th April, 2023).

Suppose your accounting year usually runs from May 1st to April 30th each year. Your accounting date is 30th April Let us consider your profit or loss for the accounting year beginning on May 1st, 2022, and ending on April 30th, 2023.  Your profit or loss after adjustments would be entered in its 2023/2024 tax year returns, as April 30th, 2023 falls within that tax year which runs from 6th April 2023 and ends on 5th April 2024, and not the 2022/2023 tax year.

This method of determining a business's tax liability using its accounting year as the basis period is called the "Current Year Basis."

However, under this previous system, there were specific rules in place to determine the basis period more often than not in the early years of an unincorporated business's operations. These rules sometimes led to situations where basis periods overlapped. This occurred when an unincorporated business's accounting date didn't neatly align with the tax year boundaries. These overlapping periods could result in the same profits being taxed twice, creating a tax burden. To address this, a relief known as "overlap relief" was provided, typically when a business ceased its operations.