|12 Months Ended|
Dec. 31, 2022
Note 13 — Income taxes
Loss before income tax expense is as follows (in thousands):
The components of income tax expense are as follows (in thousands):
As of December 31, 2022 and 2021 the tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities were as follows (in thousands):
The valuation allowance is primarily related to deferred tax assets for operating loss and tax credit carry-forwards and temporary differences relating to share-based compensation expense and research and development expenditure. Deferred tax assets have been recognized without a valuation allowance to the extent supported by reversing taxable temporary differences. A valuation allowance has been provided over the remaining deferred tax assets, which management considered are not more likely than not of being realized after weighing all available positive and negative evidence including cumulative losses in recent years and projections of future taxable losses.
The movements in the deferred tax asset valuation allowance for the year ended December 31, 2022 and 2021 are as follows (thousands):
Reconciliation of the U.K. statutory income tax rate, the income tax rate of the country of domicile of the Company, to the Company's effective income tax rate is as follows (in percentages):
The Company is headquartered in the United Kingdom and has subsidiaries in the United Kingdom and the United States. The Company incurs tax losses in the United Kingdom. The U.K. corporate income tax rate for the years ended December 31, 2022, 2021 and 2020 was 19% in each year. The Company’s subsidiary in the United States has generated taxable profits due to a service agreement between the Company’s subsidiaries in the United States and the United Kingdom. The U.S. federal corporate income tax rate was 21% for the years ended December 31, 2022, 2021 and 2020, respectively.
The United Kingdom’s Finance Act 2021, which was enacted on June 10, 2021, maintained the corporate income tax rate at 19% up until the year commencing April 1, 2023, at which point the rate will rise to 25%. The planned increase remained in place as of December 31, 2022. As of December 31, 2022, the Company used a 25% and 21% tax rate in respect of the measurement of deferred taxes existing in the U.K. and the U.S., respectively, which reflects the currently enacted tax rates and the anticipated timing of the reversing of the deferred tax balances. In respect of the measurement of deferred taxes arising in the U.K, the increase in the income tax rate adopted by the Company from 19% as of the year ended December 31, 2020 to 25% for temporary differences reversing after the year ended December 31, 2023 increased the net deferred tax asset and corresponding valuation allowance by $21,481,000 in the year ended December 31, 2021.
As of December 31, 2022, we do not have unremitted earnings in our U.S. subsidiary.
As of December 31, 2022, we had U.K. net operating losses of approximately $526,784,000, expenditure credit carryforwards of $760,000 and U.S. tax credit carryforwards of $4,136,000. Unsurrendered U.K. tax can be carried forward indefinitely to be offset against future taxable profits; however, this is restricted to an annual £5,000,000 allowance in each standalone company or group and above this allowance, there will be a 50% restriction in the profits that can be covered by losses brought forward. U.K. tax credit carryforwards can be carried forward indefinitely to be
offset against future tax liabilities of the company. U.S. tax credit carryforwards can be carried forward for 20 years to be offset against future tax liabilities, subject to a minimum tax payment of 25% of the tax charge. The tax credit carryforwards expire between 2036 and 2042.
Our tax returns are under routine examination in the U.K. and U.S. tax jurisdictions. The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed. The Company is no longer subject to examinations by tax authorities for the tax years 2015 and prior in the U.K. and there are no ongoing enquiries in the U.K. However, U.K. net operating losses from the tax years 2015 and prior would be subject to examination if and when used in a future tax return to offset taxable income. Our U.K. income tax returns have been accepted by His Majesty’s Revenue and Customs through the period ended December 31, 2016. The Company is subject to examinations by taxing authorities in the United States for all tax years 2019 through 2022. Our U.S. federal income tax return for the year ended December 31, 2020 is currently undergoing an examination by the U.S. Internal Revenue Service. We are also subject to audits by U.S. state taxing authorities where we have operations.
Unrecognized tax benefits arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of uncertainties in the tax law. As of December 31, 2022 and 2021, the Company had no unrecognized tax benefits.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef