Monthly Archives: January 2009

Marketing your software through affiliates

affiliate marketingThe idea of paying someone for sending you business has been around for a long time. Affiliate marketing is just a new, Internet-based, take on it. An affiliate sends traffic to your website and is paid a commission on each sale.  For software this commission will typically be in the range 20-50% of the sale price (although commissions of 75% or more aren’t unheard of). Commission is usually calculated by using cookies to track the number of successful sales (‘conversions’) due to each affiliate.

In theory you can set up your own affiliate commission tracking system, but affiliates would have to trust that your system is honest. It would also involve quite a bit of wheel reinventing. Consequently most vendors use affiliate marketing systems administered by third parties such as shareasale, clickbank or commission junction. Payment processors, such as Avangate and e-junkie, also have their own affiliate marketing systems.

It sounds great. The affiliates are doing marketing for you and you only pay them when you make a sale. How can you possibly lose? In fact there are quite a few potential downsides:

  • You may end up paying commission on sales through affiliates that would otherwise have come to you direct.
  • Affiliates won’t be happy if there is any way to purchase where they don’t get their commission (‘leaks’). This might mean you may not be able to offer some forms of payment, such as cheque or credit card over the phone.
  • You will be competing against your affiliates for search engine ranking.
  • Somebody who wants to buy several copies of your software could sign up as an affiliate to get the commission on their own purchase. You then have to pay commission, but get no additional sales.
  • Affiliates may compete against you in PPC ads, driving up the cost of your ads.
  • Even though you make less on the sale, you still have the full cost of supporting the customer.
  • Some affiliates operate at the shadier end of the market and may resort to various dodgy, or even criminal, practises to get their commission, including:
    • Spam.
    • Annoying pop-up ads.
    • Cookie stuffing.
    • Misrepresenting your product.
    • Adware.
    • Buying your product with a stolen credit card.

You maybe be able to prevent some of the above abuses with appropriate terms and conditions. ( I should also point out, in the interest of fairness, that there are various ways that the affiliate might lose out on commission that is rightfully theirs. For example customers who block cookies and even fraud by vendors.)

Drawing up agreements, recruiting affiliates, providing them with marketing materials, doing the accounts and paying your affiliates all takes time. You can automate quite a lot of it, but it still takes time to set-up the system, answer questions, keep everything running smoothly and check that affiliates are behaving themselves. Time that you could be spending doing other more lucrative and interesting things. As always, there is no such thing as a free lunch.

Joel Spolsky has been an outspoken critic of affiliate marketing:

We did an affiliate program, and found it to be a big waste of time. It generated only a trickle of sales; most of the people in the affiliate program would have linked to us anyway; probably 80% of the affiliates just became affiliates to get a kickback on the one item they bought for themselves or their job.

Affiliate links only works well for mega retail sites like Amazon, where an affiliate has a chance of making a reasonable amount of money.

Our affiliate program was one of those cases where we learned that time spent improving our product pays off many times as much as time spent dinking around with so-called clever marketing schemes.

Don’t waste your time. Move on. Do something to make your product better and Just Say No.

Joel Spolsky on the Business of Software Forum

I am inclined to agree with Joel. Hard data isn’t easy to come by. But, from reading around and talking to other vendors, it seems that very few of them are getting more than 5% of their sales through affiliates. I did have a home-rolled affiliate program for Perfect Table Plan, but I shut it down because the number of sales just wasn’t worth the administration overhead. Some of the affiliates never sold a single licence. I might be more successful if I used a more automated affiliate marketing system and put more effort into recruiting higher calibre affiliates, but I still don’t think it would be the best use of my time.

I have heard that there are ‘super affiliates’ with mythical powers to drive serious sales. But these people, if they really exist, get to pick and choose amongst thousands of products to market. They are going to pick mass-market products with a proven track record and they are going to want a big commission percentage. And how do you tell who is a super affiliate and who is a wannabe? They all talk a good game.

Affiliate marketing is big business, with estimated sales of over £2 billion in the UK alone in 2006. But I suspect a lot of it is from selling ‘get rich quick’ schemes, gambling and porn – not software. Particularly not software from small companies and microISVs. Obviously a lot depends on your product and market. Perhaps if you are selling mass market software (e.g. back-up utilites or virus scanners) and you have dedicated marketing staff, it might be worth your while to run an affiliate program. But make sure you automate as much of the system as possible and be realistic about the results.

Charity T-shirts for programmers – update

tshirt41 T-shirts sold so far. I intend to make the first payout to SightSavers and Jaipur Foot once most of that commission has cleared. Thanks to everyone that purchased a T-shirt and to all the bloggers that helped to publicise it. Special thanks to Patrick McKenzie for setting up a dedicated site on his server. We intend to leave the site up for the foreseeable future in the hope of getting more sales through organic search.

If you have any good ideas for a T-shirt design I could use, feel free to email them to me. Or, if you have the artistic skills I lack, I would love some help with designs.

If you haven’t already bought a T-shirt – now is the time! Zazzle currently has an inauguration weekend sale – a $4.40 discount for all T-shirts for the next 2 days. Just use code 440SHIRTSALE when you purchase from the Zazzle shop.

Qt to be available for free under LGPL

qtToday Nokia announced that the cross-platform Qt framework is to be released under the LGPL, with no developer licensing fees or royalties. As someone who has been using Qt continuously for the last 9 years, this is of particular interest to me. Especially since the hefty annual renewal fee for my commercial Qt licence is due in a few months.

Here is the email I received from Nokia:

Dear Qt User:

Nokia is pleased to announce that with the release of Qt 4.5 you will be able to use Qt under the Lesser General Public License (LGPL) version 2.1 terms. When released in March 2009, Qt will be made available under three licensing options: Commercial, LGPL and GPL. Prior versions of Qt are not impacted by this announcement.

Nokia is committed to Qt and its continued development. By offering Qt under LGPL version 2.1 license terms alongside today’s licensing options Nokia hopes to:

– facilitate wider adoption of Qt across industries, desktop, web and embedded platforms.

– establish Qt as a de facto standard for application development.

– receive more valuable feedback and increased user contributions to ensure that Qt remains the best-in-class, cross-platform framework.

– extend Nokia’s existing platform commitment to the open source community.

By offering a cost-free LGPL license as well as commercial and GPL licenses to Qt, you can choose the license model that best fits your development requirements.

Irrespective of which license model you choose:

– Qt Software is committed to continuing to provide our customers with the same level of professional support, services and regular releases you have come to expect of Qt Software.

– We will continue to actively develop Qt, and with a greater degree of cooperation with the community through a new contribution model, we hope to make Qt even more valuable to our users.

For more information on the introduction of the LGPL license and what this means for you, please consult the Frequently Asked Questions section on

Best regards

Tom Miller

Director of Sales

Nokia, Qt Software

I am a big fan of QT. Over the years it has evolved into an extremely polished and comprehensive framework, with: impressive cross-platform capabilities across a wide range of desktop OSs and embedded devices; C++ and Java APIs; excellent documentation and  a wide range of supporting tools (there is now even a cross-platform Qt IDE). The introduction of WebKit also takes Qt some way towards bridging the desktop/web divide. Widely admired by developers, the main stumbling block to Qt’s wider adoption has been the relatively high cost of commercial development licences.

Qt has been available for a while with both commercial and GPL licensing. The commercial version is expensive and the GPL version is free. However, using the GPL means you have to release the source of your own application, which is enough to make it unattractive to the vast majority of commercial software vendors. With the LGPL you can use the Qt libraries for free while keeping your own code proprietary.

So why would Nokia licence Qt under the LGPL? They even have a page on their site saying why they don’t think the LGPL is a good fit for Qt. A commercial licence for Qt is expensive, both in initial purchase costs and annual maintenance. Why is Nokia giving up a fat revenue stream? I am too cynical to believe that it is pure altruism. I guess the Qt licence fees are fairly insignificant to their new owner, Nokia, and they see it as an important strategic step to allow their mobile devices to compete against the free iPhone and Android APIs. Feel free to speculate on alternative motivations in the comments below.

As a commercial Qt licencee I am still working out the full implications of switching to LGPL Qt.

  • Including a copyright notice, the licence agreement and a link to the downloadable Qt source shouldn’t be a problem.
  • Shipping a linker and object files isn’t realistic, so I would probably have to dynamically link Qt. I much prefer static linking to avoid ‘DLL hell’ issues.
  • It isn’t clear whether all the Qt classes and widgets available in the commercial version are available in the LGPL version. Does it include the Qt 3 -> Qt 4 backward compatibility layer?
  • Will I still be able to get decent technical support, or will I need to buy a support contract?

I haven’t had time to assimilate it all yet. But I think a number of trends could make the free LGPL Qt into a big player in the future:

  • The increasing interest in cross-platform tools due to the growing Mac market share and an increasing numbers of mobile devices.
  • The neverending uncertainties about the future of Delphi.
  • The shortcomings of .Net for some types of development, e.g. ‘shrinkwrap’ software.
  • Microsoft’s apparent lack of enthusiasm for MFC and Windows Forms.
  • The many technical strengths of Qt.

It certainly looks like very bad news for directly competing cross-platform technologies such RealBasic and WxWidgets.

Further reading:

PS/ Thanks Nokia (I think)!

Interview with Mike Dulin

Mike DulinMike Dulin is well known amongst microISVs and shareware authors. He runs the Internet’s oldest software review site and attends many events, such as SIC, ISDEF and ESWC, to interview  industry figures for his podcast. I have turned the tables  and asked him to be the interviewee for once.

What is your background? When and how did you first get involved with the software business?

I got my first PC, a laptop with the check I got from the IRS (the US tax people) in 1994 or 95. They had come after me for back taxes.  After over a year of back and forth, we settled and they sent me money.

After I got my laptop I was left scratching my head while trying to figure out what to do with the $2,500 item. It was at this time that I discovered the Internet and the concept of Shareware.

Discovering the Internet was one thing – getting on it was another. I was at that time living half the year in Guatemala where I didn’t have a telephone – or the possibility of getting one in the near future.  So I made a deal with the next door neighbor who had a phone and we ran wires from his house to mine.

At this time Shareware was being uploaded to ftp sites – plus I was getting monthly disks of software sent to me. I saw the need for some place on the Internet for independent reviews of software.  So I started in late 1995 and early 1996.

What are the biggest changes you have seen in the industry in that time?

The biggest one of course is the amount of software being developed.  This worked in conjunction with the Big Three:

1. More computers
2. Faster Internet
3. Cheap storage

Have you been involved in the programming side of the business?

I was slightly  involved in programming in 1962 while serving as a Radarman in the U.S. Navy on the aircraft carrier USS Enterprise.  We had the first computerized radar system in the Navy.

Do you think it easier for small software companies to make a living  now than it was when you first started?

Hard to say. Today the barriers to entry are much cheaper than they used to. However the competition is stiffer.

I understand you live between the US, Finland and Guatemala. Can you tell us a bit about your roving lifestyle?

I medically retired from being a air traffic controller at Chicago Enroute Air Traffic Control Center 1975 at age 32. Not too long after that I decided to hit the road in my 1959 VW Convertible. In August 1976 I ended up in Guatemala. Late that year I had to get out of Dodge with my new girl friend, She and I traveled around the world for 2 years and decided we wanted to settle down somewhere and we ended up back in Guatemala. And almost immediately broke up. I stayed.

I met my Finnish wife Aira in a restaurant in our village (Panajachel) in 1987. Our son Pat was born there in 1992.  The next year we bought another home in Finland. Aira and I traveled around Europe for months before Pat came along, since Pat’s birth, besides moving back and forth between Finland and Guatemala, we all have traveled extensively around the USA.

Two years ago I bought a houseboat on eBay that was in Minnesota. That summer my son and I traveled on the Mississippi River. Last year we put the boat on a lake in Wisconsin, my home State,

Can you get a reliable Internet connection in Guatemala?

Yes. In our village of about 10,000 there is Cable Internet, ADSL and my wife is there now using a new system that uses a plug in wireless card that covers most of the country.

You are currently President of the Association of Shareware Professionals. Can you tell us a bit about the ASP?

The ASP was founded in 1987 by the pioneers in our industry.  Since then it has grown to over 1,000 members from all over the world. It is the one place where developers and vendors new to the business can get help they need to make their businesses a success. This is mostly done by use of our private forums and the information gained by reading our monthly magazine ASPects. All for $100 a year, now there is a bargain!

How long have you been involved with the ASP? How has the ASP evolved in that time?

I joined the ASP in 1997. One of the big changes has been the involvement of more members worldwide. At first what was mostly an organization of people from North America has grown into a world wide group.  It has been interesting to see as the industry developed first from North America, like I said, the majority of members were from there, then when European developers and vendors got into the business our membership expanded to them. Then the Russian and old Soviet countries came on board and we got members from there.  Now we are getting Chinese members. So we have a very diverse group now.

Another thing that has happened is that some of our members have grown into mainstream businesses and also mainstream companies have joined the ASP. For example, WinZip has grown into the mainstream and Microsoft is one of our members.

The ASP pioneered the PAD format used by most download sites. Do you think PAD has been a blessing  or a curse?

Both. I have a constant running internal battle trying to get my head around it. While it has made it easier for developers to submit their software to many sites, Google has made this a case of good news, bad news. Google has made it possible for this myriad of sites to exist because of the advertising money they can get from Google – though this has diminished over the years with the increase of many more essentially link farms.

Managing programmers has been likened to herding cats. How do you get  anything done in an organization of busy, self-employed entrepreneurs?

Sometimes it can be difficult because of the differing viewpoints of people. But in the end we all are trying to work for the better of the organization.

A major role of the ASP has been to promote the try-before-you-buy model of marketing software. Do you think that battle has been won now?

Yes, of course, since almost every company now offers it.

The word ‘shareware’ is synonymous with ‘amatuerish’ to many professional developers. Do you see this as a problem for the ASP?

We are constantly fighting that fight.  It is the reason that most members won’t list that they are members on their site. Of course you can look at it another way, what difference would it make to the recruiting part of the ASP if members put up links to the ASP on their sites?  Maybe not much at all since most prospective members aren’t going to developers sites to find out what professional organization to join are they?

What benefits does the ASP offer to microISVs/Indie  developers/shareware authors today?

Big ones! Our members have the knowledge of what it takes to make it in this business and they are willing to share it and help out fellow members.

The other big benefit that most people don’t think about until after they join is the ASP’s member community. These are people who think like you, understand you and want to help you.  And not just with computer stuff…

Most of the ASP members are selling desktop software for Windows. Do  you think that it has much to offer for web, Mac and iPhone developers?

Like everyone else who stays abreast of current trends more and more of our members are looking at other ways of making a buck. This includes Mac, Web and iPhone development.

What is the next step if someone wants to join the ASP or ask a question about  joining?

Go to or email me at:

president { at }

Thanks Mike.

Mac OS X market share accelerates in 2008

2008 was a good year for Apple and Mac OS X. According to data (via sharewarepromotions blog) Mac OS X’s share of the OS market increased from 7.31% in Dec 2007 to 9.63% in Dec 2008. That is a 32% increase in market share during 2008, compared to a 22% increase during 2007.


Windows market share fell from 91.79% to 88.68% in the same time. While Mac OS X’s annual gains are impressive, it has a long way to go to catch Windows. 15 years if you project the 2008 gains forward.

macosx_vs_windows_market_share_2007_2008Of course, it is highly questionable to project 15 years from a single year of data, but it gives an idea how much work Apple still has to do.

I sell table planning software for Windows and Mac OS X. Mac visitors to my website have followed the general trend, up from 7.41% in 2007 to 8.5% in 2008 and accounting for around of 10% of visitors at the end of 2008.

macosx_visitor_percentage% Mac visitors to

My data also shows that Mac users are twice as likely to purchase my software as Windows users (I have heard similar figures have reported by others). So Mac users currently account for 20% of my sales. I wouldn’t want to live off my Mac sales, but it is very useful additional income. Given the disparity in cost between Windows and Mac hardware it is hardly surprising that Mac users are more ready to reach for their credit card.

My software is built on top of the Qt cross-platform toolkit. The recent porting of Qt 4.5 to Cocoa gives me the opportunity to further improve PerfectTablePlan’s Mac look and feel and to release a 64 bit version. Hopefully this, coupled with increasing Mac market share, will further improve my Mac sales.

A beta of Windows 7 has just been released.  It will be interesting to see if it can repair some of the damage caused by Vista and slow the growth of Mac OS X. Personally, I doubt it – the Windows 7 feature list certainly doesn’t set my pulse racing.

Yahoo can modify your PPC campaign without your permission

I tried Yahoo pay-per-click a few years ago, but gave up due to low traffic, high minimum bid prices and a horrible user interface. I am glad I did. Apparently Yahoo Search Marketing have given themselves permission to:

  • create ads
  • add and/or remove keywords
  • optimize your account(s)

for US advertisers, without asking their permission first. One can only wonder what ‘optimize’ means – double your bid price? You can revert their changes, but you are still liable for any costs their changes incur. Isn’t this a bit like the phone company deciding you aren’t making enough calls and phoning people on your behalf? There doesn’t even appear to be an opt-out. Yahoo must be getting pretty desperate. Let’s hope they are better at picking new keywords than Microsoft Advertising.

More details here:

If you have a Yahoo PPC campaign you might want to think about cancelling it. Or at least keep a very close eye on it. If you have actually experienced Yahoo making changes to your campaigns please post details in the comments.

(via Adriana Iordan of Avanagate)

Running a microISV

microISVConsumers and businesses are being more careful with their money now, but they are still buying software if it will save them time and/or money. If you have been laid off in the current recession, perhaps now is a good time to start that microISV you have been thinking about. But starting your own business can be a bit daunting if you haven’t done it before. What is actually involved in the day to day running of a small software business?

Disclaimer: The information below is based on my my experience of running a microISV as a UK-based limited company for 4 years. It is far from comprehensive and is merely intended to give you some pointers. I am not an accountant. I am not a lawyer. Some of the information will not be relevant to businesses based outside the UK.  Seek appropriate professional advice.


Probably the first thing you should do when you decide to go into business is to get an accountant. An accountant will be able to advise you on bookkeeping, tax, VAT, company rules and regulations and any number of other topics. As you aren’t a large or publicly listed company they don’t have to be a chartered accountant. Changing accountant later may be painful, so try to get it right first time. Ideally try to find your accountant by personal recommendation and someone you think you will get on with. Everything can be done by phone and email, so they don’t have to be in the same town.

Setting up a company

You don’t have to have a company. But it does have some advantages:

  • It makes it easier to separate your personal and business finances, which can only be a good thing.
  • It gives you some legal protection. If someone decides to sue due to a bug in your software, they will have to sue your company, rather than you personally. So you have less chance of losing your house.
  • It has some tax advantages.
  • You can impress members of the opposite sex by putting ‘Director’ on your business card.

Having a company also has certain obligations, such as filing annual returns and company accounts. Much of it can now be done online. The company annual return is pretty straightforward. You just need to list who the company officers and shareholders are. The tax return is more complicated and something I wouldn’t want to do without the help of an accountant.

Setting up a limited company in the UK is fairly easy, simple and cheap. In theory you could read all the necessary documents and do all the paperwork yourself. But surely there are better uses of your time when you can get an accountant to do it for you for as little as £90.


When you choose a bank you need to consider:

  • Charges – per month and per transaction.
  • Services – e.g. foreign currency accounts.
  • Customer service – how long will you have to wait on the phone to speak to someone?
  • Convenience – you don’t want to have to drive to the next town to pay in a cheque.
  • Interest – are their rates competitive?
  • Guarantees – is the money guaranteed if the bank goes bust?

It may also be a good idea to choose a separate bank from your personal bank, to keep your business and personal finances separate. This could also be important if you ever got into a dispute with your bank.

Having had very good experiences with HSBC through FirstDirect, I chose HSBC for my business banking. However I was unimpressed by the service I received. This included queuing 40 minutes to pay in a cheque and calls to the branch 2 miles away being routed via India (I got fed up of spelling out H-i-g-h W-y-c-o-m-b-e). I was also irked by the service charges. £0.60 to pay in a cheque! When I told them what I thought of their service they made an appointment for someone to come and see me. They never turned up. No apology, nothing.

I have since switched my banking to Alliance and Leicester business bank. I have been happy with the service and there are no charges as long as you pay in at least £1,000 per month. I can also pay in cheques at any Post Office (if the UK government doesn’t close them all).


If you are selling to other companies, rather than just consumers, you will have to deal with invoices. Invoices are a subject of mystery to many developers, but really they are just a note to someone that they owe you money. In theory the sequence is:

  1. Customer asks for a quote.
  2. You send a quote (include an expiry date).
  3. Customer sends a signed purchase order.
  4. You send the software licence key with an invoice.
  5. Customer pays the invoice within the time specified by the invoice.

Yeah, right. In reality many companies pay months late. This helps to improve their cash flow at your expense. But, according to Hanlon’s razor, one should ‘Never attribute to malice that which is adequately explained by stupidity’ and I am sure that the apathy and incompetence of accounting staff is also a large factor.

The invoice itself is nothing special. It should include:

  • The word ‘INVOICE’ in large letters.
  • Your company details (including your VAT details, if registered).
  • A unique invoice number.
  • The date.
  • Customer details, including their purchase order number.
  • A description of the product sold and the price (including the currency).
  • Details of how to pay, e.g. your SWIFT/IBAN code and/or who to make the cheque payable to.
  • The payment terms (typically 30 days).

You might want to number your first invoice 0100, rather 0001, if you don’t want early customers to know you are a newbie.

Dealing with the late payment of invoices is a whole topic on it’s own. Personally I don’t invoice for payments of <£100 or $200 – it just isn’t worth the hassle. And I always pay my bills on time. It is the right thing to do.


Don’t fight the system, you can’t win. Computing is <70 years old. Accounting is as old as recorded history. Suck it up and learn the appropriate terminology. Consider doing a class on basic bookkeeping.

An accountant is not a bookkeeper. They may agree to do your bookkeeping, but it is likely to be expensive. Personally, I do my own bookkeeping. It is a bit tedious, but it means I know exactly where every penny goes and I can listen to a podcast at the same time to alleviate the boredom.

I started off using Excel for my bookkeeping. In retrospect this was a mistake.

  • You are on your own when it comes to generating reports, such as profit and loss.
  • Mistakes are easy to make and hard to find in large Excel spreadsheets.
  • Excel doesn’t scale very well to hundreds or thousands of transactions.
  • Your custom Excel spreadsheet is much more difficult (=expensive) for your accountant to work with than the package he normally uses.

Sales receipts, advertising, salary, dividends, ISPs, postage, stationery, professional fees etc.  can add up to a lot of transactions. Even with sales batched up into weekly blocks, a one man business such as mine can easily generate over 600 transactions a year. You really don’t want to be trying to track all this in Excel. Much better to use a purpose-built accounting package.

The market leading package for small businesses worldwide appears to be Intuit Quickbooks. Others are Sage (popular in the UK) and MYOB. I recommend you chose whatever package your accountant is happiest to work with. Get your accountant to set it up for you. Trying to use a personal finance package, such as Microsoft money, to run a business is almost certainly a bad idea.

I switched from Excel to Intuit QuickBooks. Initially I hated it. But once I accepted that it was written for bookkeepers, not software developers, we reached a grudging acceptance of each other. Now I just spend an hour or so updating Quickbooks every 1-2 weeks and making sure it tallies with my bank statements. I then send my accountant a copy of the database at the end of each financial year. He then uses this data to create the company annual accounts and tax return.

Don’t leave the bookkeeping until the end of the tax year. You will end up with hundred of scraps of paper to match up with hundreds of transactions. This is an N^2 problem. As with any polynomial problem, you should try to keep N small. Also, your accountant has lots of other clients and won’t thank you for asking him to create your annual report by midnight to meet the filing deadline.

Try to get a receipt for everything. I number receipts sequentially, write that number on the receipt and include it in the Quickbooks transaction memo. I then file the paper receipt in a folder partitioned by month. This should mean that I can easily find the appropriate receipt if (when?) I get audited by the tax man.

In my experience it is common to be invoiced for the wrong amount or twice for the same things. Some companies will even try it on by invoicing you for things you didn’t agree to buy. So check every incoming invoice. Companies don’t appear to put their best, brightest and most cooperative in the accounts department.  Get used to it.

Managing cash flow is a huge issue for businesses. Any number of healthy and profitable businesses have gone to the wall due to cash flow problems. This shouldn’t be an issue for most microISVs as we don’t have to spend a large proportion of our income on equipment or maintain expensive inventories. Hooray for software.


I accept payment in various currencies through PayPal. PayPal charge a 2% fee for converting these payments to pounds sterling on top of their other fees. I have previously looked into opening a US dollar account, but it didn’t seem worth the hassle or expense. The Alliance and Leicester Bank charge a £10 fee to cash a cheque in US dollars.


MicroISVs, like other one-man limited companies, typically pay themselves a minimal salary (around 5k per year) and the rest as dividends. This means that no income tax is payable on your salary. Instead you pay corporation tax on the dividends. As corporation tax is typically lower than basic rate income tax, this is more tax efficient. However you still have to pay higher rate income tax if your income exceeds the higher rate income tax threshold.

Whenever I pay a dividend I transfer the amount of corporation tax that will be due on the profit to my business reserve account. At the end of the tax year I then know I have enough in this account to pay my corporation tax.

If you sell more than £67k per year (currently) of goods inside the EU you must register for VAT. If you sell less than this, registering for VAT is optional.

Advantages of registering for VAT:

  • You can claim back VAT on all purchases.
  • Not having a VAT number may make you seem ‘not a real business’ to other businesses.

Disadvantages of registering for VAT:

  • You have to charge VAT on all sales inside the EU. Businesses can claim this back, but consumers can’t.
  • More paperwork.

Consequently a B2C software vendor with large profit margins probably shouldn’t register until they have to. But VAT registration might be much more attractive to a B2B software vendor with lots of expenses. Apparently you can claim back some of your VAT payments retrospectively when you register.

Some other points on tax:

  • You can give your spouse shares in the company and pay them that proportion of the dividends. This is tax efficient if they earn less then you. But will only add to your woes if they ever run off with the milkman/milkwoman.
  • When you are applying for a mortgage some banks will only count your salary, not your dividends. A £5k salary doesn’t go far, even in the current housing market.
  • If you work at home you can charge a percentage of your heating, electricity, council tax etc or rent part of the house to your company. But you may then be liable to pay capital gains tax on any increase in value of the house.
  • In the UK you can claim £55 per week tax-free in childcare vouchers. The childcare provider must be registered with OFSTED. You don’t need a physical paper voucher – just pay the childcare provider direct from your company and keep all the appropriate records (including their OFSTED number).
  • The UK government pays a reasonable rate of interest on early payments of corporation tax. You might get more interest paying your corporation tax early than leaving it in a savings account. Also you don’t have to worry about the bank going under with your savings. Of course you will still have to pay tax on the interest next year.
  • I have also written an article on the basics of VAT for software vendors.

Additional resources

  • UK Business Link. Business link is a free business advice and support service, available online and through local advisers. Useful for generic business advice – don’t expect them to know anything about the software business.
  • UK Companies house. Where you go to set up your company and make annual returns.
  • UK HM Revenue and Customs. They have always been very helpful when I rang them with a query.
  • Andrew Wells. The accountant I use. Good service at a reasonable price. UK based.