Income taxes

12 Months Ended

Dec. 31, 2023

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,
	2023		2022		2021
United Kingdom	$	(182,980)	$	(116,275)	$	(69,546)
United States		3,773		2,034		1,064
Total	$	(179,207)	$	(114,241)	$	(68,482)

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

	Year Ended
	December 31,
	2023		2022		2021
Current income tax (benefit) provision
Federal	$	(1,180)	$	2,048	$	(2)
State		(669)		1,404		7
Total current income tax (benefit) provision		(1,849)		3,452		5
Deferred income tax provision (benefit)
Federal		2,513		(4,111)		(1,236)
State		793		(865)		(432)
Total deferred income tax provision (benefit)		3,306		(4,976)		(1,668)
Total provision for (benefit from) income taxes	$	1,457	$	(1,524)	$	(1,663)

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

	Year Ended
	December 31,
	2023		2022		2021
Provision for (benefit from) income taxes at statutory rate	23.5	%	19.0	%	19.0	%
(Decreases) increases resulting from:
Federal tax credits	0.3	%	0.3	%	0.6	%
Change in valuation allowance	(14.8)	%	(16.8)	%	(27.0)	%
Net losses surrendered for research credit	(11.1)	%	(6.5)	%	(5.9)	%
Impact of statutory rate change	2.7	%	11.3	%	12.1	%
Impact of foreign exchange rates	(0.1)	%	(9.9)	%	—	%
Other	(1.3)	%	3.9	%	3.6	%
Effective income tax rate	(0.8)	%	1.3	%	2.4	%

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

	December 31,
	2023		2022
Deferred tax assets:
Operating loss carryforwards	$	66,555	$	45,452
Operating lease liability		3,680		3,566
Share-based compensation		15,577		9,842
Capitalized research and development expenses		—		5,168
Accrued expenses and other		2,742		2,318
Total deferred tax assets		88,554		66,346
Deferred tax liabilities:
Operating lease right-of-use asset		(3,389)		(3,474)
Depreciation & amortization		—		(933)
Total deferred tax liabilities		(3,389)		(4,407)
Valuation allowance		(80,274)		(53,743)
Net deferred tax assets	$	4,891	$	8,196

During the year ended December 31, 2023, the Company recorded an income tax provision of $1.5 million, and during the years ended December 31, 2022 and 2021, the Company recorded an income tax benefit of $1.5 million and $1.7 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 provision for (benefit

from) income taxes included in the 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. During the year ended December 31, 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 the recognition of an income tax provision of $2.4 million during the year ended December 31, 2023. The Company's income tax benefit recognized during the years ended December 31, 2022 and 2021 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 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, 2023 by $26.5 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, 2023 and 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 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 provision for (benefit from) 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, 2023, the Company had $266.2 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, 2023 and 2022. 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 2022 and 2021 tax years remains open to examination by the 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 2020 in the U.S. remain open to examination. The Company is currently not under examination by jurisdictions for any tax years.