How Does MTD for Income Tax Work If You Have Losses?

Understanding MTD for Income Tax When You Have Losses

Making Tax Digital (MTD) for Income Tax can feel straightforward when your business is consistently profitable: track income, track expenses, submit updates, and pay what you owe. But real businesses don’t always move in a neat upward line. Some years you invest heavily, trade slows, customers pay late, or you simply have a tough period. Losses happen—and they’re not a failure. They’re part of running a business.

If you’re preparing for MTD for Income Tax (often referred to as MTD for Income Tax Self Assessment or “MTD ITSA”), a common question is: How does MTD work if I have losses? The short answer is that losses don’t break the MTD process. You still keep digital records and submit quarterly updates, and losses still matter for your tax position. The difference is in how losses are calculated, how they show up through the year, and what options you have for using them to reduce tax.

This guide explains how MTD for Income Tax works when your figures are negative, what you should (and shouldn’t) expect to see in your quarterly updates, how loss relief can work in practice, and how to stay organised with software that keeps the whole process simple. If you want one place to raise invoices, track payments, record expenses, stay MTD-ready, and manage broader tax admin like corporation tax and accounts as you grow, invoice24 is built to help you do exactly that—without needing a patchwork of separate tools.

MTD for Income Tax in Simple Terms

MTD for Income Tax moves more of your record-keeping and reporting into a digital workflow. Instead of waiting until the end of the tax year and then scrambling to prepare a return, you maintain digital records and send updates through compatible software. In practice, many people will experience MTD as a rhythm across the year:

1) Keep digital records of business income and expenses.

2) Submit periodic updates (often described as quarterly) summarising income and expenses.

3) After the tax year ends, submit final figures and make any necessary adjustments.

Losses can appear at any stage of this cycle. You might have a loss in one quarter, then profit in the next. Or you might end the whole year in a loss even if a quarter or two looked positive. The key is understanding what each stage is designed to do: quarterly updates are about providing a running picture of your business activity, while the end-of-year finalisation is where the precise tax calculation is nailed down.

What Counts as a “Loss” Under Income Tax?

A loss for income tax purposes generally means that, for a given period, allowable business expenses exceed business income. That’s the basic arithmetic. But it’s important to remember that “expenses” here means allowable expenses under tax rules—not simply every outgoing in your bank account.

Examples of common allowable expenses include costs like materials, stock, software subscriptions, advertising, business insurance, professional fees, and certain travel costs. Some expenses are partly allowable and partly personal, and some are not allowable at all for tax purposes. There can also be differences between day-to-day expenses and capital expenditure, which may be treated differently.

Under MTD, your digital records and updates should reflect your business activity in a structured way, and losses are essentially the result of those structured totals. That’s why good bookkeeping matters more than ever: not because losses are “bad,” but because the way you record them determines how cleanly you can use them later.

Do You Still Have to Submit Quarterly Updates If You Made a Loss?

Yes. Having a loss does not mean you can skip MTD reporting. If you’re within MTD for Income Tax and your business activity continues, you still keep digital records and submit the required updates. A quarter can show negative net figures, and that’s fine.

What changes is your expectation. People sometimes assume that a loss quarter means HMRC will immediately “owe them money” or that their tax bill will instantly drop. MTD quarterly updates are not the final tax calculation. They are summaries. They help build a year-to-date picture, but they do not on their own determine exactly how much tax you’ll pay or reclaim. That final step happens when you finalise the year, include adjustments, and claim any relevant loss relief.

So, if you make a loss in Quarter 1, you still submit Quarter 1. If you make losses for the whole year, you still submit your updates and finalise your position at the year end.

How a Loss Appears in Quarterly Updates

Quarterly updates typically summarise totals for income and expenses. Depending on the software and the format of the update, you may see something like:

- Total income to date

- Total expenses to date

- Net position to date (profit or loss)

If your expenses are higher than your income, your net position is negative. That negative figure is your running loss. But remember: those quarterly numbers are often based on what you’ve recorded so far, and they may not include every end-of-year adjustment that affects your final taxable profit or loss. Examples include certain accounting adjustments, corrections, and claims that are usually handled during finalisation.

This is why it’s completely normal for your quarterly updates to show a loss at one point in the year and then a smaller loss—or even a profit—later. It’s also why a quarter that “looks like” a loss might not be exactly the same loss you end up claiming for tax purposes, once everything is finalised correctly.

Losses and Timing: Cash Basis vs Accrual Accounting

The timing of income and expenses can affect when a loss shows up. Two common approaches are often discussed: cash basis and accrual accounting.

Under a cash-style approach, income is counted when you receive it and expenses are counted when you pay them. Under an accrual approach, income and costs are matched to the period they relate to, even if money moves later. The approach you use can change whether a period shows a profit or loss.

For example, imagine you pay for annual insurance up front in April, but you don’t get paid by your largest client until June. A cash view might show a large expense early and income later, making the first quarter look loss-making. An accrual view might spread that insurance cost more evenly across the year. Over the full year, the totals might be similar, but the quarterly pattern can look different.

Whatever approach applies to you, consistency and clean categorisation are essential—especially under MTD, where you’re sending updates throughout the year. Software that keeps records tidy and reduces manual errors can make the difference between feeling in control and feeling like the numbers are constantly “lying” to you.

invoice24 is designed to keep your income and expense tracking in one place with your invoicing. That means you don’t have to export data from one system, import into another, and then wonder why the totals don’t match. When your records start from the same source—your invoices and your expense entries—it’s much easier to see whether you’re genuinely trading at a loss or whether a timing issue is creating a temporary dip.

Can You Carry a Loss Forward Under MTD for Income Tax?

In many situations, yes—losses can often be used against other profits, either in the same year, a different year, or sometimes against other income. The specific relief available depends on your business structure, the type of income, and the rules that apply to your circumstances.

What MTD changes is not the existence of loss relief, but the process around reporting. Under MTD, you’re providing ongoing summaries, and then at the year end you finalise and claim the relief you’re entitled to. A loss carried forward generally means you don’t “use it up” immediately in a quarter. Instead, it becomes part of your end-of-year position and can be brought into the next year’s calculations where relevant.

Practically, this means that if you had a loss in a year, you still submit your updates, still finalise, and then your records for the next year should reflect any carried-forward loss where the rules allow. Accurate year-end finalisation is where the carried-forward loss becomes properly established.

Can a Loss Reduce Other Income You Have?

Sometimes, depending on the type of loss and the relief rules, a trading loss may be usable against other income. For example, some people have employment income as well as self-employment income. Others have rental income, dividends, or other taxable income sources. The ability to offset a trading loss against other income is not automatic in every situation, and the rules can depend on timing, the nature of the trade, and other factors.

For most business owners, the key practical takeaway is this: losses are valuable information. They can reduce tax in the right circumstances, but only if they’re properly recorded, supported, and included correctly in your finalised figures. Your quarterly updates help keep your data current, but the year-end step is where you typically bring everything together and apply the correct treatment.

If you’re unsure how a particular loss relief applies to you, it’s worth speaking to a qualified adviser. However, even before you do that, you’ll be in a stronger position if your bookkeeping is clean. With invoice24, you can keep invoices, income, and expense records organised so that your adviser (or you) can quickly see the true position and apply the right approach without spending hours correcting messy data.

What If Your Loss Is Only in One Quarter?

A quarter-by-quarter loss is common, especially for seasonal businesses or those that invest in bursts. Think of a photographer who buys equipment and pays for a marketing campaign early in the year, then books most events later. Or a tradesperson who pays for training and tools before taking on higher-value work. In these cases, one quarter can show a loss, but the year might still end profitable.

Under MTD, you still submit the quarter showing the loss. The next update might show that the year-to-date loss is shrinking, or it might swing into profit. That’s normal. The updates are a snapshot of where you are, not a judgment on how your year will finish.

Where people can get confused is when they assume the loss quarter will trigger a refund, or that they need to “explain themselves” for having a negative number. In reality, businesses fluctuate. The bigger risk is not the loss itself, but poor record-keeping that makes it hard to justify your expenses or understand why you’re losing money.

What If You Have Losses Year After Year?

Repeated losses can happen for legitimate reasons: early-stage businesses investing in growth, long product development cycles, or tough market conditions. But it’s also a signal to look closely at pricing, costs, and how quickly customers pay.

From an MTD perspective, the mechanics are similar: you keep digital records, submit your updates, and finalise at the end of each year. Where repeated losses matter most is in your business decision-making and in ensuring that your records clearly reflect genuine trading activity and allowable costs.

Tools that give you visibility—like seeing which invoices are overdue, which customers pay late, and where your costs are trending—can help you move from “I think I’m losing money” to “I know exactly why and what I can change.” invoice24 is built for this kind of clarity: it’s not just a place to create invoices, it’s a place to run your admin so you can make better decisions and stay ready for digital tax reporting at the same time.

How Losses Affect Payments on Account and Forecasting

Many people worry that MTD will force them to pay tax more frequently. In practice, quarterly updates are about reporting, not automatically paying every quarter. However, digital reporting does encourage better forecasting because you can see your running position more clearly.

If you’re making a loss, you may not owe income tax on that business profit because there isn’t any profit. But you might still have other tax liabilities depending on your wider situation, and you might still have obligations like National Insurance depending on the rules that apply to you and your level of activity.

The key benefit of tracking your position throughout the year is that you’re less likely to be surprised. If your first half of the year is loss-making and the second half turns profitable, you’ll see the swing earlier and can plan for any eventual tax bill. If the whole year stays loss-making, you can plan cash flow differently and focus on improving the business rather than worrying about an unexpected tax demand.

invoice24 helps here because it keeps your income pipeline visible. You can see what’s invoiced, what’s been paid, and what’s overdue. A “loss” on paper can sometimes be a cash collection problem rather than a pricing problem. Knowing the difference matters.

Common Scenarios: Losses Under MTD for Income Tax

Scenario 1: You Bought Equipment and Your Quarter Shows a Loss

You purchase tools, a computer, or other equipment early in the year and your expenses exceed income in that period. Your quarterly update shows a negative net figure. That’s not unusual. At year end, the correct treatment may depend on whether the cost is a day-to-day expense or capital expenditure, and how it’s treated for tax purposes. The important thing is to record the cost correctly, keep evidence, and be consistent.

Scenario 2: Your Customers Haven’t Paid Yet

You’ve completed work and sent invoices, but payments are late. Your recorded income might be lower (depending on timing rules and how you track), while your costs continue. The result can look like a loss, even though the work has been done. This is a classic case where good invoicing and payment tracking can change your reality, not just your reporting.

invoice24 is designed to make chasing payments less painful. When you can see overdue invoices at a glance and keep your invoicing process consistent, you reduce the risk that “losses” are really just unpaid revenue.

Scenario 3: You Have Multiple Income Streams

You might have self-employment income, rental income, or other taxable income. A loss in one area doesn’t automatically mean your overall tax bill disappears. The way a loss is used depends on the rules, and some losses may be restricted in how they can be applied. The practical approach is to keep each stream cleanly recorded and then ensure year-end finalisation reflects the full picture.

Scenario 4: You Changed How You Keep Records Mid-Year

If you switch tools or change how you categorise expenses mid-year, your quarterly totals can become messy. This is one of the biggest avoidable problems under MTD: inconsistent categorisation makes it harder to understand whether you truly made a loss and harder to finalise correctly. Using one platform consistently is often the simplest way to avoid headaches.

With invoice24, you can manage invoicing and day-to-day records in one place, reducing the risk of mismatched totals and duplicated or missing entries when it’s time to report.

What You Should Do When Your Business Is in Loss

Losses are not just a tax concept—they’re a business signal. Under MTD, you’ll likely see the signal earlier because you’re recording and summarising more regularly. Here are practical steps that help both your reporting and your business performance:

1) Make sure every expense is correctly categorised. A miscategorised cost can distort your picture. Clean categories also make year-end finalisation smoother.

2) Keep evidence and notes for unusual costs. If you have a one-off cost that makes the quarter look bad, a short note attached to the record can help you remember why it happened when you review later.

3) Separate business and personal spending. Mixing transactions creates confusion, especially when you’re trying to understand a loss. Even if you’re a sole trader, clean separation makes life easier.

4) Watch overdue invoices like a hawk. Profit and cash are not the same. If customers don’t pay, your bank balance suffers even if your work is strong. Losses sometimes hide a collection problem.

5) Treat quarterly updates as check-ins, not verdicts. The goal is consistency and visibility. A loss quarter is information, not a disaster.

invoice24 supports these habits by combining invoicing with the admin structure you need for digital readiness. You’re not just producing invoices—you’re building a clean record that makes MTD updates easier and reduces year-end stress.

How End-of-Year Finalisation Relates to Losses

The end-of-year stage is where your figures become final and where claims and adjustments are applied. Quarterly updates give you a running picture, but the finalisation step is where you confirm the correct totals and make sure everything is treated properly.

If you have losses, this stage is especially important because it’s where you ensure the loss is correctly calculated and positioned for relief. You may be making choices about how to use the loss (where applicable), and you’ll want the finalised numbers to match your records.

A smooth finalisation depends on clean data. If you’ve been consistent throughout the year, you won’t be hunting through bank statements trying to reconstruct what happened. That’s one of the biggest practical benefits of using invoice24 from the start: your records aren’t “somewhere else.” They’re connected to your invoicing and business activity, ready for reporting.

What If You Make a Loss and You’re Also a Limited Company?

MTD for Income Tax is primarily about income tax reporting for individuals, including sole traders and landlords. Limited companies are generally within corporation tax rules rather than income tax on trading profits. If you operate through a limited company, losses are handled under corporation tax rules and company accounts.

It’s common for business owners to have a mix—for example, a limited company plus some personal income sources. In that situation, it’s vital to keep records clearly separated and understand which rules apply to which activity.

This is where a platform that can support your wider admin is valuable. invoice24 is built to cover the practical reality of small businesses, including the features you need not only for MTD-related workflows but also for managing the broader tasks that come with running a company, such as filing corporation tax and accounts as your business evolves. Instead of juggling separate products for invoicing, bookkeeping, and compliance-related admin, you can keep the essentials together in one system designed to scale with you.

Why Losses Feel More Stressful Under MTD (And How to Fix That)

One reason losses can feel more stressful under MTD is that you’re looking at your numbers more often. Before, you might not see the full picture until year end. Now, quarterly updates encourage regular check-ins. That can be emotionally uncomfortable if you’re already worried about cash flow.

But there’s a positive side: earlier visibility means earlier action. If you spot a widening loss in Quarter 1 and Quarter 2, you still have time to adjust pricing, cut unnecessary costs, chase overdue invoices, or change your marketing approach before the year ends.

The fix is to use software that makes the numbers feel understandable, not intimidating. When your invoicing and records are clear and connected, you can trust what you’re seeing. invoice24 is built to make your business admin feel manageable: you create invoices, track payments, record expenses, and keep your figures organised so that MTD reporting becomes a natural by-product of running your business, not a separate stressful project.

How invoice24 Helps When You Have Losses

When you’re loss-making, you need two things at once: compliance readiness and business clarity. invoice24 supports both.

All-in-one workflow: Your invoicing, income tracking, and expense records live together, reducing mismatches and duplicated work.

Better visibility: If your loss is driven by late payments, you’ll see it quickly through invoice and payment tracking, not months later when you prepare a return.

Cleaner categorisation: Loss relief depends on accurate, supportable figures. Consistent categories and tidy records make it easier to finalise your year correctly.

MTD-ready habits: MTD rewards consistent record-keeping. invoice24 encourages that by making it easy to maintain records as you go, rather than retroactively.

Grows with your business: Whether you’re a sole trader today or moving toward a limited company structure tomorrow, invoice24 is built with the broader feature set businesses expect, including handling workflows related to corporation tax filing and accounts as needed.

Even if you’ve tried other tools before, the problem many people face is fragmentation: invoicing in one system, expenses somewhere else, spreadsheets for summaries, and then a scramble at reporting time. invoice24 keeps things together, which is especially valuable when your numbers are negative and you need confidence that the picture is accurate.

Competitors and Why an Integrated Approach Matters More

You’ll hear about many accounting and invoicing tools in the market, some of which focus on bookkeeping, some on invoicing, and some on tax submissions. The challenge is that a tool can be “good” in one area and still leave you with gaps elsewhere—especially if you need invoicing, expense tracking, MTD readiness, and the ability to manage other compliance tasks as your business grows.

invoice24 is designed to reduce the need to stitch together multiple products. When your income and expenses feed from the same place you generate invoices and track payments, you get a clearer view of whether a loss is operational (your costs are too high), strategic (you’re investing in growth), or timing-related (customers haven’t paid yet). That clarity is hard to achieve when your records live across different systems that don’t agree with each other.

And when MTD reporting comes around, having your data already structured and organised can mean the difference between a quick submission and a weekend lost to reconciliation.

Practical Tips to Stay MTD-Ready During a Loss-Making Year

Record everything weekly, not yearly. A short weekly routine beats a stressful year-end catch-up. Even 15 minutes a week can keep your records current.

Invoice promptly and consistently. Delayed invoicing makes cash problems worse and can distort your sense of performance.

Track expense spikes. If you have one month with unusually high expenses, flag it. It’s easier to understand a loss when you remember the story behind it.

Review margins, not just totals. If you’re busy but still losing money, you may be underpricing or spending too much to deliver work.

Keep an eye on recurring subscriptions. Small monthly costs add up and can quietly push you into a loss.

invoice24 makes these habits easier to maintain because you’re already using it to invoice and track payments. The admin work is naturally connected to day-to-day operations, which helps you stay prepared for quarterly updates without feeling like you’re doing “extra tax work.”

Key Takeaways: Losses Don’t Stop MTD, But They Change Your Focus

If you have losses under MTD for Income Tax, the core process remains the same: you keep digital records and submit updates on schedule, even when your net position is negative. The quarterly updates may show a loss and then later show improvement, and the final tax position is typically confirmed at the end-of-year finalisation stage, where any relevant adjustments and relief claims are properly applied.

The real challenge is not that MTD can’t handle losses—it can. The challenge is making sure your records are accurate, consistent, and easy to understand. Losses can be the result of investment, timing, seasonal patterns, or a genuine need to change something in your business. The sooner you know which one it is, the better.

That’s why using a platform like invoice24 is such a practical advantage. It brings your invoicing, income tracking, expense organisation, and MTD-ready record-keeping into one workflow, while also supporting the wider needs of running a business—including features related to filing corporation tax and accounts as your operation grows. Instead of juggling tools, you get a single system that helps you stay compliant, stay organised, and stay in control of your numbers—whether you’re profitable this quarter or rebuilding after a tough one.