• R&D relief for pure maths

R&D relief for pure maths

19 July 2022

UK R&D reliefs are government funding designed to promote the generation of new knowledge amongst competent professionals that is gained by undertaking innovative projects associated with science and technology. However, this technological and scientific focus has meant that projects seeking advancements in theoretical fields, such as pure mathematics, are not currently eligible R&D activities.

This is expected to change from 1 April 2023, as the government intends to reform R&D tax relief to include pure maths as an eligible activity.

Pure or applied?

Advancements related to applied maths can already qualify for an R&D tax relief claim, but where the project strays into pure maths there can be uncertainty and disputes over claims. Pure maths is not currently defined within tax legislation, but it is generally acknowledged to be the study of mathematical concepts that do not have any application outside of mathematics, effectively differentiating it from applied maths.

This lack of clarity over how ‘pure maths’ is defined and interpreted by HMRC has led to increased risks when claiming R&D tax relief on projects and sub-projects whose innovation is largely mathematical, even where the intended output would have an industrial application, such as those related to finance, shipping, and automotive insurance.

Explicit guidance on how project eligibility assessments are going to be conducted for activities related to pure maths has yet to be published. Nevertheless, we believe that this legislative change will have a large impact on industries that previously had a contentious filing position for their R&D claims because of the mathematical nature of their innovations.

Finance – Algorithmic trading and financial engineering

With algorithmic trading systems being used more and more widely when trading equity and alternative assets, it comes as no surprise that companies are investing large amounts of money to further improve the performance of their algorithmic systems.

The current R&D rules focus on activities that seek some form of a physical advancement (i.e. reduced computational energy consumed to carry out the calculation). If the new rules also enable financial KPIs to be deemed a metric of an eligible advancement (such as alphas generated, trading signal accuracy, maintaining accuracy even when reducing the number of data variable inputs, etc.), we expect to see an increase in claims from hedge funds, investment banks and pension funds.

Shipping Insurance

As insurance costs are one of the largest operational expenses in shipping, great efforts have been made to find better ways to underwrite, spread and pool the respective risk for insurers. However, such research activities require complex risk management and risk modelling exercises which, to date, cannot be included in an R&D tax relief claim. This is because such activities have been considered to be an advance in social science, not necessarily contributing to the generation of new scientific or technological knowledge. If the inclusion of pure maths as an eligible activity leads to the re-classification of seeking actuarial science advances as eligible activity, we anticipate a large increase in R&D tax relief claims from shipping insurance companies.

Automotive insurance

Automotive insurance companies use telematic data from black box systems to better understand and capture how specific driving characteristics and trends correlate to driving accidents and, by extension, repair and damage costs. This is achieved by leveraging complex data models and statistical inference techniques, which are in turn utilised to better estimate the insurance cost and thereby insurance premiums.

These innovations have historically been based on data modelling and statistics, and did not warrant the development of new hardware software systems, so the cost of such activities would not have been claimed in an R&D tax relief claim. If the definition of pure maths within the new legislation permits improved modelling accuracy to qualify as a form of advancement in its own right, even without the need to appreciably enhance the technology itself (for example, the python libraries carrying out these analytics), the automotive insurance industry would welcome such a positive change.

​Help with your R&D claims

BDO has extensive experience in helping financial services businesses identify which elements of their research projects qualify for R&D tax relief, and we will be closely monitoring the development of the new rules on pure maths - bookmark this page for updates as the legislation and HMRC guidance emerges.

For help and advice on your current R&D claims, please contact Claire McGuigan or Tim Scott.