R&D has always played a prominent role in developing actuarial technology, improving financial forecasting, making investments more secure, and creating better business risk models.
Actuaries are not only breaking significant new ground with the advent of machine learning and artificial intelligence (AI); the UK Government’s R&D relief schemes now reward the mathematical techniques that power advancements in actuarial technology.
The government offers tax relief in the form of R&D Tax Credits to businesses that are working on making advancements in scientific and technological fields. In the last few years, HMRC updated its guidelines to include pure mathematics within the definition of R&D for tax relief purposes, which opened the door to actuaries being able to make significant claims for their innovations.
In this article, we explain how actuary research and development can potentially qualify for claiming R&D relief, and how this can help to fuel further innovations and growth.
How advancements in actuarial technology are breaking new ground
In the UK, the actuarial sector is expected to generate £4.8bn in 2024, with further growth forecast for the next five years. While the sector’s growth is healthy, it’s also very competitive. For actuaries to maintain their competitive edge, they must invest in innovation for growth – developing improved ways of assessing risk to make better decisions – but also looking to break into new markets.
Traditionally, actuarial consultants work with insurance products or pensions and investments. But with the rapidly developing AI and machine learning sectors, which improve how we can gather, analyse, interpret and leverage data, major new fields for scientific and technological breakthroughs are emerging.
A recent interview in The Actuary Magazine, a senior actuarial consultant at Ernst & Young highlighted eight new areas where actuarial advancements are breaking new ground, including:
- InsurTech and digital transformation
- Pension innovation and retirement solutions
- Emerging markets and global insurance development
- Cybersecurity and data privacy
- Climate risk and sustainability
- Behavioural economics and consumer behaviour
- Ethics and fairness in algorithmic decision-making
- Health technology and telemedicine
As pure mathematical advancements underpin each of these developments, there is a clear opportunity for UK businesses to benefit financially from claiming R&D Tax Credits.
How pure mathematics makes actuarial R&D eligible for R&D relief
While pure mathematics might traditionally be thought of as an abstract field, HMRC clarified their definition by saying that “Pure mathematics involves the exploration of new mathematical concepts, the development of new theories and techniques and the discovery of new mathematical relationships and patterns.” This means that mathematical advancements in areas like probability and statistics, along with mathematical concepts used in computer science like algebra and discrete maths, can now be included in tax relief claims.
This can be a very valuable benefit for actuarial companies, as they will be able to claim tax relief for:
- Staff costs
- Software
- Data licence and cloud computing costs
- Contractor payments
- Contributions for independent R&D
- Qualifying indirect activities (e.g., admin related solely to the R&D project)
- Consumable items
The government created R&D tax relief for the specific purpose of driving innovation. The financial benefits from claims can be reinvested in growth through hiring and training staff, expanding facilities, buying or upgrading equipment and even for new R&D projects.
Below, we give an illustration of an example actuarial R&D Tax Credits claim:
Example actuarial claim scenario
A fleet motor insurance company has developed a new telematics insurance model that considers other factors like weather and road conditions. As well as more accurately predicting risk, it dynamically adjusts premiums based on real-time data.
To develop the algorithm that powers this model, a team of 30 actuarial scientists had to apply pure mathematics to analyse and test the complex mathematical relationship between all the various data points and a driver’s risk profile.
To create their model, the scientists designed a new way of integrating telematics, real-time weather and road condition data. The team faced uncertainty when developing a mathematically sound way of adapting the model to update itself regularly with all the incoming real-time data. They overcame the uncertainty by experimenting with different machine learning algorithms with the goal of finding one that could handle the variability in the real-time data.
As pure mathematics was used to develop this advancement, the project is eligible to claim R&D Tax Credits. Employee costs, including salary, pension, overtime and bonuses are all qualifying expenditures. So, if a team’s total staff costs amounted to £2 million for thirty people and 40% of their time was devoted to this telematics R&D project, the total qualifying expenditure would be £800K, so their benefit calculation would be as follows:
| Qualifying R&D Expenditure | £800,000 |
| RDEC Rate | 20% |
| RDEC Tax Credit | £160,000 |
| Corporation Tax (CT) Rate | 25% |
| Net Benefit (Tax Saving) | £120,000 |
How Leyton can help
At Leyton UK, we have a team of experts who specialise in helping businesses claim R&D Tax Credits for projects that are underpinned by advanced mathematics.
Our highly qualified tax and technical consultants can unlock considerable savings by identifying all eligible spending, creating a robust claim that will meet HMRC’s high standards for compliance.
Is your company developing innovative breakthroughs in the actuarial technology sector? Book a meeting with one of our experts today.
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