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Income Taxes
12 Months Ended
Dec. 31, 2021
Income Taxes  
Income Taxes

12. Income Taxes

The components of net loss before tax provision from income taxes are as follows (in thousands):

Year Ended

December 31, 

    

2021

    

2020

    

2019

United Kingdom

$

(69,546)

$

(52,521)

$

(31,906)

United States

 

1,064

 

787

 

1,044

Total

$

(68,482)

$

(51,734)

$

(30,862)

The components of the benefit for income taxes are as follows (in thousands):

Year Ended

December 31, 

    

2021

    

2020

    

2019

Current income tax provision (benefit)

 

  

 

  

 

  

Federal

$

(2)

$

(24)

$

49

State

 

7

 

(27)

 

61

Total current income tax provision (benefit)

 

5

 

(51)

 

110

Deferred income tax (benefit) provision

 

  

 

  

 

  

Federal

 

(1,236)

 

(435)

 

(295)

State

 

(432)

 

(238)

 

(69)

Total deferred income tax (benefit)

 

(1,668)

 

(673)

 

(364)

Total benefit from income taxes

$

(1,663)

$

(724)

$

(254)

A reconciliation of the benefit for income taxes computed at the statutory income tax rate to the benefit for income taxes as reflected in the financial statement is as follows:

Year Ended

December 31, 

    

2021

    

2020

 

2019

Benefit for income taxes at statutory rate

 

19

%  

19

%

19

%

(Decreases) increases resulting from:

Federal tax credits

 

0.6

%  

0.9

%

1.3

%

Change in valuation allowance

 

(27.0)

%  

(15.4)

%

(8.0)

%

Net losses surrendered for research credit

 

(5.9)

%  

(6.2)

%

(5.3)

%

Preferred share warrants

 

%  

%

(3.3)

%

Impact of statutory rate change

12.1

%  

1.8

%

%

Other

 

3.6

%  

1.3

%

(2.9)

%

Effective income tax rate

 

2.4

%  

1.4

%

0.8

%

Significant components of the Company’s current and deferred tax assets at December 31, 2021 and 2020, were as follows (in thousands):

Year Ended

December 31, 

    

2021

    

2020

Deferred tax assets:

Operating loss carryforwards

$

30,536

$

13,657

Research credit carryforwards

 

1,862

 

1,233

Operating lease liability

3,626

285

Accrued expenses and other

 

5,902

 

3,050

Total deferred tax assets

 

41,926

 

18,225

Deferred tax liabilities:

Operating lease right-of-use asset

(3,665)

(270)

Depreciation & amortization

 

(439)

 

(311)

Total deferred tax liabilities

 

(4,104)

 

(581)

Valuation allowance

 

(34,601)

 

(16,085)

Net deferred tax assets

$

3,221

$

1,559

During the years ended December 31, 2021, 2020 and 2019, the Company recorded an income tax benefit of $1.7 million, $0.7 million, and $0.3 million, respectively. The Company is subject to U.K. corporate taxation. Due to the nature of its business, the Company has generated losses since inception and therefore not paid U.K. corporation tax. The Company's income tax benefit is mainly the result of deferred tax assets benefited in the United States that do not have a valuation allowance against them because of profits that will be generated by an intercompany service agreement.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighed the evidence based on its objectivity. After consideration of the evidence, including the Company's history of cumulative net losses in the United Kingdom, the Company has concluded that it is more likely than not that the Company will not realize the benefits of its U.K. deferred tax assets and accordingly the Company has provided a valuation allowance for the full amount of the net deferred tax assets in the United Kingdom. The Company has considered its history of cumulative net profits in the United States and estimated future taxable income and has concluded that it is more likely than not that the Company will realize the benefits of its U.S. deferred tax assets and has not provided a valuation allowance against the net deferred tax assets in the United States. The valuation allowance increased in the year ended December 31, 2021 by $18.5 million due to the corresponding increase in U.K. deferred tax assets, primarily due to operating loss carryforwards generated during the year that were not surrendered for research credit utilization.

The Company recorded a valuation allowance against all of its U.K. deferred tax assets as of December 31, 2021 and 2020.

The Company intends to continue to maintain a full valuation allowance on its U.K. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The release of the valuation allowance would result in the recognition of certain deferred tax assets and an increase to the benefit for income taxes for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company is able to actually achieve.

The benefit for income taxes shown on the consolidated statements of operations differs from amounts that would result from applying the statutory tax rates to income before taxes primarily because of certain permanent expenses that were not deductible and U.K., U.S. federal and state research and development credits, as well as the application of valuation allowances against the U.K. deferred tax assets.

As of December 31, 2021, the Company had $120.3 million of U.K. operating loss carryforwards as well as $1.8 million and $1.5 million of federal and state net operating loss carryforwards, respectively. The U.K. operating loss

carryforwards have an indefinite life. The state net operating loss carryforwards begin to expire in 2031 and the federal net operating loss generated in 2021 can be carried forward indefinitely. As of December 31, 2021, the Company had $1.2 million and $0.8 million of federal and state research and development credit carryforwards, respectively, that expire at various dates through 2041.

The Company recognizes, in its consolidated financial statements, the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company had no uncertain tax positions during the years ended of December 31, 2021 and 2020. There are no amounts of interest or penalties recognized in the consolidated statement of operations or accrued on the consolidated balance sheet for any period presented. The Company does not expect any material changes in these uncertain tax benefits within the next 12 months.

The Company files income tax returns in the United Kingdom, and in the United States for federal income taxes and in Massachusetts, Rhode Island, New Jersey, Washington DC, and New Hampshire for state income taxes. In the normal course of business, the Company is subject to examination by tax authorities in these jurisdictions. The 2020 and 2019 tax years remains open to examination the by HM Revenue & Customs. The statute of limitations for assessment with the Internal Revenue Service is generally three years from filing the tax return. As such, all years since 2018 in the U.S. remain open to examination. The Company is currently not under examination by jurisdictions for any tax years.