Annual report pursuant to Section 13 and 15(d)

Income taxes

v3.20.4
Income taxes
12 Months Ended
Dec. 31, 2020
Income taxes  
Income taxes

Note 13 — Income taxes

Loss before income taxes is as follows (in thousands):

Year ended

Year ended

Year ended

December 31, 

December 31, 

December 31, 

    

2020

    

2019

    

2018

U.S.

$

(1,359)

$

(494)

$

(1,650)

U.K.

(128,571)

(136,429)

(93,367)

Loss before income taxes

$

(129,930)

$

(136,923)

$

(95,017)

The components of income tax expense are as follows (in thousands):

Year ended

Year ended

Year ended

December 31, 

December 31, 

December 31, 

    

2020

    

2019

    

2018

United States:

Federal

$

162

$

242

$

400

State and local

97

U.K.

Total current tax expense

162

242

497

United States:

Federal

State and local

U.K.

Total deferred tax expense

Total income tax expense

$

162

$

242

$

497

As of December 31, 2020 and 2019 the tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities were as follows (in thousands):

December 31, 

December 31, 

    

2020

    

2019

Deferred tax liabilities

Property, plant and equipment

$

(796)

$

(1,251)

Right-of-use assets

(2,009)

(2,364)

Other

(156)

(79)

Total

(2,961)

(3,694)

Deferred tax assets

Share-based compensation expense

9,292

9,941

Intangibles

1,745

1,413

Operating lease liabilities

2,343

2,550

Net operating loss and expenditure credit carryforwards

71,742

48,837

Other

237

125

Total

85,359

62,866

Valuation allowance

(82,398)

(59,172)

2,961

3,694

Net deferred tax asset (liability)

$

$

The valuation allowances are primarily related to deferred tax assets for operating loss and tax credit carry-forwards and temporary differences relating to share-based compensation expense. 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 valuation allowance for the year ended December 31, 2020 and 2019 are as follows (thousands):

2020

    

2019

Valuation allowance at January 1,

$

59,172

$

40,776

Increase in valuation allowance

20,329

16,961

Foreign exchange translation adjustments

2,897

1,435

$

82,398

$

59,172

The net change in valuation allowance of $20,329,000 includes $23,025,000 which was recognized in net loss, offset by $2,696,000 recognized in other comprehensive loss.

Reconciliation of the U.K. statutory income tax rate to the Company's effective tax rate is as follows (in percentages):

Year ended

Year ended

Year ended

December 31, 

December 31, 

December 31, 

    

2020

    

2019

    

2018

    

U.K. tax rate

19.0

%  

19.0

%  

19.0

%  

Reimbursable tax credits within Research and development expense

2.8

%  

2.8

%  

3.5

%  

R&D expenditures surrendered for R&D tax credit refund

(8.4)

%  

(7.7)

%  

(10.0)

%  

Expenses not deductible

(1.4)

%  

%

(0.2)

%  

Permanent differences for unrealized foreign exchange on intercompany loans of a long-term investment nature

%  

(1.5)

%  

%  

Change in valuation allowances

(17.8)

%  

(12.4)

%  

(17.5)

%  

Change in tax rates

4.1

%  

%  

%  

Difference in tax rates

%

(1.2)

%

(1.3)

%

R&D tax credits generated

1.8

%

1.5

%

5.1

%

Other

(0.1)

%  

(0.7)

%  

1.0

%  

Effective income tax rate

(0.0)

%  

(0.2)

%  

(0.5)

%  

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 weighted-average U.K. corporate tax rate for the years ended December 31, 2020, 2019 and 2018 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 tax rate was 21% for the years ended December 31, 2020, 2019 and 2018, respectively.

The United Kingdom’s 2019-21 Finance Bill, which was enacted on July 22, 2020, maintained the corporation tax rate at 19% from April 1, 2020 and for the year commending April 1, 2021. This removed the previously enacted reduction in the corporation tax rate to 17% from April 1, 2020. As of December 31, 2020, the Company used a 19% and 21% tax rate in respect of the measurement of deferred taxes arising in the U.K. and the U.S., respectively, which reflects the currently enacted tax rates and the anticipated timing of the unwinding of the deferred tax balances. In respect of the measurement of deferred taxes arising in the U.K, the increase in the tax rate adopted by the Company from 17% in the year ended December 31, 2019 to 19% in the year ended December 31, 2020 has increased the net deferred tax asset and corresponding valuation allowance by $5,675,000. The effect of the change in tax rates on the Consolidated statement of operations is $nil, after consideration of the change in valuation allowance.

As of December 31, 2020, we do not have unremitted earnings in our U.S. subsidiary.

As of December 31, 2020, we had U.K. net operating losses of approximately $334,400,000, expenditure credit carryforwards of $700,000 and U.S. tax credit carryforwards of $7,500,000. Unsurrendered U.K. tax losses and tax credit carryforwards 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 2040.

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 2013 and prior in the United Kingdom. However, U.K. net operating losses from the tax years 2013 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 Her Majesty’s Revenue and Customs through the period

ended December 31, 2016. The Company is subject to examinations by tax authorities in the United States for all tax years 2013 through 2020. Our U.S. federal income tax return for the year ended June 30, 2014 and December 31, 2016 were audited by the U.S. Internal Revenue Service and resulted in no changes. 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 the uncertainties described above. As of December 31, 2020 and December 31, 2019, the Company had no unrecognized tax benefits.