Income taxes

12 Months Ended

Dec. 31, 2022

Income taxes

Income taxes

10. Income taxes

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

	Year Ended
	December 31,
	2022		2021		2020
United Kingdom	$	(116,275)	$	(69,546)	$	(52,521)
United States		2,034		1,064		787
Total	$	(114,241)	$	(68,482)	$	(51,734)

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

	Year Ended
	December 31,
	2022		2021		2020
Current income tax provision (benefit)
Federal	$	2,048	$	(2)	$	(24)
State		1,404		7		(27)
Total current income tax provision (benefit)		3,452		5		(51)
Deferred income tax (benefit) provision
Federal		(4,111)		(1,236)		(435)
State		(865)		(432)		(238)
Total deferred income tax (benefit)		(4,976)		(1,668)		(673)
Total benefit from income taxes	$	(1,524)	$	(1,663)	$	(724)

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,
	2022		2021		2020
Benefit for income taxes at statutory rate	19	%	19	%	19	%
(Decreases) increases resulting from:
Federal tax credits	0.3	%	0.6	%	0.9	%
Change in valuation allowance	(16.8)	%	(27.0)	%	(15.4)	%
Net losses surrendered for research credit	(6.5)	%	(5.9)	%	(6.2)	%
Impact of statutory rate change	11.3	%	12.1	%	1.8	%
Impact of foreign exchange rates	(9.9)	%	—	%	1.3	%
Other	3.9	%	3.6	%	—	%
Effective income tax rate	1.3	%	2.4	%	1.4	%

Significant components of the Company’s current and deferred tax assets are as follows (in thousands):

	December 31,
	2022		2021
Deferred tax assets:
Operating loss carryforwards	$	45,452	$	30,536
Research credit carryforwards		—		1,862
Operating lease liability		3,566		3,626
Share-based compensation		9,842		4,406
Capitalized research and development expenses		5,168		—
Accrued expenses and other		2,318		1,496
Total deferred tax assets		66,346		41,926
Deferred tax liabilities:
Operating lease right-of-use asset		(3,474)		(3,665)
Depreciation & amortization		(933)		(439)
Total deferred tax liabilities		(4,407)		(4,104)
Valuation allowance		(53,743)		(34,601)
Net deferred tax assets	$	8,196	$	3,221

During the years ended December 31, 2022, 2021 and 2020, the Company recorded an income tax benefit of $1.5 million, $1.7 million, and $0.7 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.

Starting in 2022, amendments to Section 174 of the Internal Revenue Code of 1986, as amended (“IRC”), will no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. Instead, these IRC Section 174 development costs must now be capitalized and amortized over either a five- or 15-year period, depending on the location of the activities performed. The new amortization period begins with the midpoint of any taxable year that IRC Section 174 costs are first incurred, regardless of whether the expenditures were made prior to or after July 1, and runs until the midpoint of year five for activities conducted in the United States or year 15 in the case of development conducted on foreign soil.

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 U.K., 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 U.K. 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 United States 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, 2022 by $19.1 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, 2022 and 2021.

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, 2022, the Company had $181.8 million of U.K. operating loss carryforwards that have an indefinite life.

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, 2022 and 2021. 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 11 jurisdictions for state income taxes. In the normal course of business, the Company is subject to examination by tax authorities in these jurisdictions. The 2021 and 2020 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 2019 in the U.S. remain open to examination. The Company is currently not under examination by jurisdictions for any tax years.