The show's existence is in itself a spoiler for The Disappearance of Haruhi Suzumiya, so anyone who hasn't seen the movie/read the book yet has been warned.
Yuki-chan is a spinoff anime based on a manga that began in 2009. The series is written by the original author of the Haruhi series, Nagaru Tanigawa, and takes place in the alternate universe created during the events of Disappearance, in which the members of the SOS Brigade are simply normal humans, and the SOS Brigade doesn't even exist.
The spin-off focuses more on the day-to-day interactions between the characters than the original series, and follows the titular Yuki-chan as she attempts to pursue Kyon, on whom she has a crush. As the series progresses, Yuki-chan develops a friendship with Kyon as she attempts to confess to him, which leads me to believe that the series is non-canon, as the following conversation takes place in Disappearance shortly after Kyon finds himself in the alternate universe (around 3:17 in the link):
"Nagato, tell me ... do you know ... who I am?"
"I do. [...] I know that you're a student in class 5. I see you every now and then. But I don't know any more than that."
The spin-off can't take place before the events of Disappearance because Disappearance Yuki only knows Kyon from when he helped her get a library card, and it can't take place afterward because
Nagato had actually used her powers to rewrite the world and take away all supernatural elements surrounding Haruhi, not just create an alternate universe, and she reverts the change at the end of the story, erasing Disappearance Yuki and the rest of the Disappearance SOS Brigade from existence.
The series is thus probably non-canon, and doesn't fit into any specific place in the timeline.
Its plot is basically separated from that of the original series, so it can be watched independently with almost full plot comprehension. However, enjoyment of the characters and their actions might requires familiarity with the source material because the much of the show's appeal stems from gap moe, in which a perceived difference or contradiction in a person's behavior or action (i.e. "gap") is found to be cute or attractive. Yuki-chan lets viewers see the normally stoic Nagato express her feelings as a normal, shy girl, and without this contrast the show turns into another "cute girls doing cute things" anime - not that there's anything wrong with those.