|12 Months Ended|
Dec. 31, 2016
Note 11 — Income taxes
Loss before income taxes is as follows (in thousands):
The components of income tax expense (benefit) are as follows (in thousands):
At December 31, 2016, December 31, 2015 and June 30, 2015 the tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows (in thousands):
The valuation allowances related primarily to operating loss carry-forwards and temporary differences relating to share-based compensation expense, 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, taxable temporary differences, and prudent and feasible tax-planning strategies.
The valuation allowance increased by $8,182,000 in the year ended December 31, 2016, due to net deferred tax expense related to our continuing operations of $10,107,000, offset by foreign currency translation adjustments of $1,925,000.
Reconciliation of the U.K. statutory income tax rate to the Company’s effective tax rate is as follows (in percentages):
The Company is headquartered in the United Kingdom and the effective U.K. corporate tax rate for the year ended December 31, 2016, six months ended December 31, 2015 and years ended June 30, 2015 and 2014 was 20%, 20%, 20.75% and 22.5%, respectively. The U.S. federal corporate tax rate was 34% for the year ended December 31, 2016, six months ended December 31, 2015 and years ended June 30, 2015 and 2014.
The United Kingdom’s 2016 Finance Bill, which was enacted on September 15, 2016, contained reductions in corporation tax to 19% from April 1, 2017 and 17% from April 1, 2020. The Company adopted a 17% tax rate at December 31, 2016 in respect of the measurement of deferred taxes arising in the U.K., which reflects the currently enacted tax rate and the anticipated timing of the unwinding of the deferred tax balances. This has reduced from 18% at December 31, 2015. The Company has adopted a 34% tax rate at December 31, 2016 in respect of the measurement of deferred taxes arising in the U.S., which has reduced from 40% at December 31, 2015 due to the U.S. subsidiary being granted an exemption from certain state and local taxes in 2016, which we anticipate being in place for the next several years. The effect of the change in tax rates on the consolidated statement of operations is $nil, after consideration of the change in valuation allowance.
At December 31, 2016, we do not have unremitted earnings in our U.S. subsidiary.
At December 31, 2016, we had U.K. net operating loss and expenditure credit carryforwards of approximately $86.0 million that can be carried forward indefinitely. However, draft legislation has been published in the U.K. for inclusion in the Finance Bill 2017 that would, if enacted, restrict the use of operating loss and expenditure credit carryforwards from April 1, 2017, such that they would not be available for offset against more than 50% of taxable profits in any accounting period (subject to a £5 million annual allowance). We do not have any U.S. net operating loss carryforwards.
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 2011 and prior in the U.K. However, U.K. net operating losses from the tax years 2011 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, 2015. The Company is subject to examinations by tax authorities in the U.S. for all tax years 2011 through 2016. Our U.S. federal income tax return for the year ended June 30, 2014 was 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. At December 31, 2016, December 31, 2015 and June 30, 2015 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/presentationRef