Software licence

What it means

A software licence is permission to use a program on the author’s terms. You buy the right to use it within an agreed scope - users, devices, term, territory - not the program itself.

By duration it is either perpetual or subscription. That split drives the accounting too: a perpetual licence is usually an asset, a subscription a service, as with SaaS.

Not even software developed to order under a contract for work automatically belongs to the customer. Copyright stays with the author and the customer receives a licence; unless the contract grants an exclusive licence of sufficient scope, the developer may offer the same code to other clients, competitors included.

How it works in practice

A licence usable for more than a year and costing above the statutory threshold goes into long-term intangible assets and is written off (amortised). An annual subscription paid up front belongs in accruals and deferrals.

The records track how many seats were bought and who holds them. As a team grows that is the simplest way not to pay twice, or to use more licences than are paid for.

With a licence from a foreign supplier we assess whether the payment is a royalty from which tax must be withheld when paying. The content of the contract and the relevant double tax treaty decide it, and for an ordinary purchase of off-the-shelf software the answer is often different from a right to modify or distribute the program.

What to watch out for

Use beyond the licence is copyright infringement and expensive when a vendor audits. Take equal care with open source components inside a product - a free licence still carries conditions that must be met.

A licence bought on an employee’s or director’s personal account is tied to that person, not to the company. When they leave, the company loses both access and the data created in the program, and at an audit it is hard to argue that paying for a licence in someone else’s name was a tax-deductible expense.