Income taxes

9 Months Ended

Sep. 30, 2023

Income taxes

Income taxes

10. Income taxes

During the three and nine months ended September 30, 2023 the Company recorded an income tax provision of $2.3 million and $1.1 million, respectively, and during the three and nine months ended September 30, 2022, the Company recorded an income tax benefit of $0.2 million and $1.1 million, respectively. The Company is subject to United Kingdom corporate taxation. Due to the nature of its business, the Company has generated losses since inception and has therefore not paid United Kingdom corporation tax. The provision for (benefit from) income taxes included in the condensed consolidated statements of operations and comprehensive loss represents the tax impact from operating activities in the United States, which has generated taxable income based on intercompany service arrangements. Deferred tax assets benefitted in the United States 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”), eliminated the option to immediately deduct research and development expenditures in the tax year that such costs are

incurred. In accordance with the amendments, beginning on January 1, 2022, and continuing until the end of the second quarter of 2023, these research and development costs were capitalized by the Company and amortized over either a five- or 15-year period, depending on the location of the activities performed. In the third quarter of 2023, the Company completed an assessment, inclusive of an external tax analysis, and concluded that it is not required to capitalize certain research and development expenses incurred by its U.S. subsidiary associated with contractual research services performed on behalf of its U.K. subsidiary pursuant to an intercompany service arrangement because its U.S. subsidiary does not retain any ownership or rights in the underlying intellectual property resulting from the research services. The change in estimate upon the completion of this analysis resulted in an income tax provision of $2.4 million during the three months ended September 30, 2023. The Company's income tax benefit recognized during the three and nine months ended September 30, 2022 is mainly the result of deferred tax assets benefitted in the U.S. 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 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 the Company’s history of cumulative net profits in the U.S., estimated future taxable income and 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 U.S. The Company recorded a valuation allowance against all of its U.K. deferred tax assets as of September 30, 2023 and December 31, 2022.

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 from 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 provision for (benefit from) income taxes recorded in the condensed 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, U.K., federal and state research and development credits, as well as the application of valuation allowances against the U.K. deferred tax assets.