THE windfall tax on the extraordinary profits North Sea oil and gas companies have been making on the back of historically high prices over the last year is to be cut.

The Energy Profits Levy was brought in May last year as companies began to report massive profits in response to soaring oil and gas prices which followed Russia’s invasion of Ukraine.

Giants such as BP and Shell have announced record profits in recent months however the industry has argued that the levy will cause companies to invest in oil gas production outside the UK and force the country to rely on expensive energy imports.

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The levy amounts to a 75 per cent headline rate of tax on North Sea oil and gas company profits, albeit the UK Government has been simultaneously offering a range of generous tax incentives to help ensure producers continue to invest in new projects. But it was announced this morning that the levy will fall back to 40% “when prices consistently return to normal levels for a sustained period”.

The UK Government announced the energy profit levy will remain in place until March 2028 and will introduce a new energy security investment mechanism that it said would protect domestic energy supply and safeguard jobs. It noted that the mechanism will give the oil and gas sector the confidence to raise capital and invest in new and existing projects to help secure affordable and reliable domestic energy supply.

Based on forecasts by the Office for Budget Responsibility, it added, the mechanism will not be triggered before the levy is planned to end in March 2028. It said the levy has raised around £2.8 billion to date, stating that this has helped fund measures to help people with the cost-of-living crisis, and is expected to raise nearly £26bn by the end of its lifespan.

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Alongside the tax incentives brought in with the energy profits levy, the UK Government has opened applications for more North Sea exploration licences. This could lead industry regulator the North Sea Transition Authority awarding more than 100 new licences later this year.

Gareth Davies MP, Exchequer Secretary to the Treasury, said it would be “beyond irresponsible to turn off the North Sea taps overnight”.

He added: “Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”