Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

14. Income taxes

The components of net loss before income taxes for the years ended December 31, 2022 and 2021 are as follows (in thousands):

	December 31,
	2022			2021
U.K.	$	(156,000	)	$	(147,337	)
Non-U.K.		2,966			3,581
Net loss before taxes	$	(153,034	)	$	(143,756	)

The provision for (benefit from) income taxes for the years ended December 31, 2022 and 2021 are as follows (in thousands):

	December 31,
	2022			2021
Current (benefit) provision
Federal—United States	$	618		$	(1,025	)
State—United States		144			334
Other foreign		147			388
United Kingdom		—			—
Total current (benefit) provision		909			(303	)
Deferred provision (benefit)
Federal—United States		(3,066	)		1,099
State—United States		(204	)		(312	)
United Kingdom		(13	)		—
Other foreign		—			344
Total deferred provision (benefit)		(3,283	)		1,131
Total provision (benefit) for income taxes	$	(2,374	)	$	828

The following table presents a reconciliation of income tax expense (benefit) computed at the UK statutory income tax rate to the effective income tax rate as reflected in the consolidated financial statements (in thousands):

	December 31,
	2022			2021
Income taxes at United Kingdom statutory rate	$	(29,072	)	$	(27,313	)
Change in valuation allowance		34,333			59,691
Reduction in research expense for credits granted		1,805			6,674
Change in tax rates		(8,240	)		(38,785	)
Tax credits		(2,049	)		(2,232	)
U.S. Deduction for foreign derived intangible income		(1,489	)		(196	)
Permanent differences, including share-based compensation deduction shortfalls		2,387			2,863
U.S. state income taxes		(45	)		17
Foreign rate differential		(4	)		109
Total provision (benefit) for income taxes	$	(2,374	)	$	828

The Company’s income tax expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, decreased primarily related to an increase of the U.S. deduction for foreign derived intangible income (“FDII”), a decrease to the amount of shortfalls related to share-based compensation that is not deductible for tax purposes, and a decrease in the non-U.K. profit before tax.

During 2021, the U.K. Government announced that from April 1, 2023, the corporation tax rate would increase to 25%. This new law was enacted on June 10, 2021. The overall effect of the change was an increase in net deferred tax assets of $38.8 million and an increase in valuation allowance by an equal amount.

The Company accounts for income taxes in accordance with ASC Topic 740. Deferred income tax assets and liabilities are determined based upon temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The following table presents the principal components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 (in thousands):

	December 31,
	2022			2021
Deferred tax assets
Net operating loss carryforwards	$	158,344		$	126,563
Amortization		11,215			25,206
Research and development credits		2,525			2,449
Capitalized research and development costs		2,285			—
Share-based compensation		9,282			9,353
Accruals		946			798
Lease liability		6,126			6,444
Property and equipment		—			1,022
Total deferred tax assets		190,723			171,835
Valuation allowance		(177,630	)		(161,573	)
Fixed assets and right-of-use asset		(5,724	)		(6,176	)
Other non-current assets (net deferred tax assets and liabilities)	$	7,369		$	4,086

For the years ended December 31, 2022 and 2021, the Company had cumulative U.K. net operating loss carryforwards of approximately $633.4 million and $506.2 million, respectively. U.K. losses not surrendered may be carried forward indefinitely, subject to numerous utilization criteria and restrictions and are fully offset by a valuation allowance. For the years ended December 31, 2022 and 2021, the Company also had U.S. federal orphan drug tax credits of $0.7 million and $0.6 million, respectively, and U.S. state research and development tax credits of $2.2 million and $2.4 million. The U.S. federal orphan drug tax credits expire in 2042, while the U.S. state research and development credits may be carried forward indefinitely and are offset by a valuation allowance.

In measuring the Company’s deferred tax assets, the Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for all or some portion of the deferred tax assets. Significant judgment is required in considering the relative impact of the negative and positive evidence, and weight given to each category of evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed. Additionally, the Company utilizes the "more likely than not" criteria established in FASB ASC Topic 740 to determine whether the future tax benefit from the deferred tax assets should be recognized. As a result, the Company has established valuation allowances on the deferred tax assets in jurisdictions that have incurred net operating losses and in which it is more likely than not that such losses will not be utilized in the foreseeable future.

As of each reporting date, the Company considers new evidence, both positive and negative, that could impact the Company’s view with regard to the future realization of our deferred tax assets. Management has considered the Company’s history of cumulative net losses in the U.K., along with estimated future taxable income and 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 U.S. state research and development tax credits. Accordingly, the Company has maintained a full valuation allowance against these net deferred tax assets as of December 31, 2022 and 2021, respectively.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2022 and 2021 related primarily to the increase in UK net operating loss carryforwards as follows (in thousands):

	December 31,
	2022			2021
Valuation allowance as of beginning of year	$	(161,573	)	$	(103,890	)
Increases recorded to income tax provision		(34,248	)		(59,691	)
Effect of foreign currency translation		18,191			2,008
Valuation allowance as of end of year	$	(177,630	)	$	(161,573	)

The Company applies the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Company to determine whether a tax position of the Company is more likely than not to be sustained upon

examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority. There were no material uncertain tax positions as of December 31, 2022 and 2021.

The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2022, and 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations.

The Company and its subsidiaries file income tax returns in the UK, the U.S., and various foreign jurisdictions. Generally, the tax years 2018 through 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the federal, state, or foreign tax authorities, if such tax attributes are utilized in a future period.