Manage loss claims for MTD for Income Tax if you’re a sole trader

This article explains how sole traders can add and edit loss claims for Making Tax Digital (MTD) for Income Tax using FreeAgent. It also explains how to manage brought forward losses.

If you’re a landlord, read how to manage property loss claims for MTD for Income Tax.

If you make a loss for tax purposes in any one year (if your allowable expenses plus capital allowances outweigh your income), you may be able to use that loss to reduce your tax bill in some way. Using a loss to reduce your tax bill is called 'loss relief'.

You may be able to set the loss against other income you've received in the same year (for example, salary from a job) and claim back tax you've already paid on that income. You may be able to carry the loss back against income from previous years or you can carry the loss forward to set against future profits from that trade.

The rules around when each kind of loss relief can be used are complex, especially as losses can be treated differently for tax and National Insurance. If you've made a loss and you're not sure how you can claim relief on it, please speak to your accountant. If you’re not currently working with an accountant, you may wish to find one through FreeAgent CoPilot.

Managing losses for MTD for Income Tax

Navigate to the ‘Taxes’ tab at the top of the screen and select ‘Income Tax’ from the drop-down menu.

Select the relevant tax year from the list.

Select the ‘Losses’ tab.

If it’s the first year that you’re using MTD for Income Tax, you can add brought forward losses for losses that you incurred before signing up for MTD for Income Tax. If it’s not your first year of using MTD for Income Tax or you’re not adding brought forward losses, you can add loss claims for the current tax year.

Managing brought forward losses

If you're moving to MTD and you had a loss carried forward from your last Self Assessment return, you’ll need to add the brought forward loss to your MTD for Income Tax submission as it won’t be carried over to the new system by HMRC.

To add brought forward losses, select ‘Yes’ under ‘Do you want to manage your brought forward losses?’ and select the ‘Add a brought forward loss’ button.

Business

First, choose which business you want to add the brought forward loss for from the ‘Business’ drop-down menu. If you have multiple businesses signed up to MTD for Income Tax, read how to use FreeAgent for Making Tax Digital (MTD) for Income Tax for multiple businesses.

Type of loss

Next, choose which type of loss you want to add from the ‘Type of loss’ drop-down menu. If you’re unsure which type of loss to choose, please speak to your accountant.

For a sole trader business, you can choose between:

• ‘Self Employment’ - if you’re carrying the loss forward and using it to reduce the self-employed profit you pay tax on in the current tax year.
   
• ‘Self Employment (Class 4 NI purposes only)’ - if you're bringing the loss forward and using it to reduce your Class 4 National Insurance (NI) liability in the current tax year, but not your tax liability, because you’ve already used it to save tax in the past.

Loss amount

Finally, enter the amount of the brought forward loss you want to add in the ‘Loss amount’ field.

Select ‘Create’ to add the brought forward loss. Repeat these steps for each business you want to add a brought forward loss for.

You can edit the brought forward loss by selecting the 'Edit' button on the right, or delete the brought forward loss by selecting the ‘X’.

Managing loss claims for the current tax year

To add a loss claim for the current tax year, select ‘Yes’ to ‘Do you want to manage your loss claims for this tax year?’ and select the ‘Add a loss claim’ button.

Business

First, choose which business you want to add the claim for from the ‘Business’ drop-down menu. If you have multiple businesses signed up to MTD for Income Tax, read how to use FreeAgent for Making Tax Digital (MTD) for Income Tax for multiple businesses.

Type of claim

Next, select which type of claim you want to add from the ‘Type of claim’ drop-down menu. If you’re unsure which type of claim to choose, please speak to your accountant.

Sole traders can choose between ‘Carry Forward’ and ‘Carry Sideways’.

Carry Forward

Use this if you want to carry losses from this year forward and use them against the first available profits of the same trade. This would be useful if you didn't make a profit last year and don't have any other income to set the loss against.

Please note that the losses would be used against the first available profits from that trade, even if those are below your personal allowance. For example, if you make a loss of £10,000 this year and then next year make a profit of £12,000, the £10,000 loss would be used against the £12,000 profit even though it’s below the personal allowance threshold.

Carry Sideways

Use this if you want to take losses from this income source and set them against a different income source in the same year. This would be useful if you made a loss this year and also have other income on which you've already paid tax, in the same year. It can also be useful if you have two trades, one loss-making and one profitable.

For example, if you have a profitable trade making £30,000 and another that lost £10,000, then you can use sideways loss relief to pay tax and Class 4 NI on the combined value of £20,000.

Type of loss

Finally, choose the type of loss you want to add from the ‘Type of loss’ drop-down menu.

Select ‘Create’ to add the loss claim. Repeat these steps for each loss claim you want to add.

You can edit the loss claim by selecting the 'Edit' button on the right, or delete the brought forward loss by selecting the ‘X’.

Reordering carry sideways losses

If you’ve added multiple Carry Sideways loss claims, you can choose which order the losses get used in.

Select ‘Reorder Carry Sideways loss claims’.

You can move the loss claims up or down the list by dragging and dropping them.

Once you’re happy with the order the losses will get used in, select ‘I’ve finished reordering’.