Note 12 — Income taxes

 

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

 

 

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

 

 

As of December 31, 2017 and 2016 the tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities were as follows (in thousands):

 

 

The valuation allowances are primarily related to deferred tax assets for operating loss 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 valuation allowance increased by $9,819,000 in the year ended December 31, 2017, which includes the impact of foreign currency translation adjustments of $1,722,000.

 

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 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, 2017 and 2016, six months ended December 31, 2015 and year ended June 30, 2015 was 19.25%, 20%, 20% and 20.75%, respectively. 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 34% for the years ended December 31, 2017 and 2016, six months ended December 31, 2015 and year ended June 30, 2015.

 

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 used a 17% tax rate as of December 31, 2017 in respect of the measurement of deferred taxes arising in the United Kingdom, which reflects the currently enacted tax rate and the anticipated timing of the unwinding of the deferred tax balances. In respect of the measurement of deferred taxes arising in the U.S, the Company has adopted a 21% tax rate as of December 31, 2017.  This rate has decreased from 34% as of December 31, 2016 due to U.S. tax reforms which were enacted in December 2017.  This reduced the net deferred tax asset and corresponding valuation allowance by $1.8 million.  We believe that other aspects of U.S. tax reforms will not have a significant impact on our income taxes.  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, 2017, we do not have unremitted earnings in our U.S. subsidiary.

 

As of December 31, 2017, we had U.K. net operating loss of approximately $135.6 million, expenditure credit carryforwards of $0.6 million and U.S. tax credit carryforwards of $0.2 million. 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 million 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.S. tax credit carryforwards can be carried forward for 20 years.

 

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 United Kingdom.  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, 2016. The Company is subject to examinations by tax authorities in the United States for all tax years 2013 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. As of December 31, 2017 and December 31, 2016, the Company had no unrecognized tax benefits.