The UK’s new defence offset policy: turning overseas procurement into UK industrial capability

The Government’s new defence offset policy marks a potentially significant change in how the UK approaches major defence and national security procurement from overseas.

The principle is straightforward: where the Ministry of Defence (MOD) buys significant capability from abroad, selected overseas suppliers may also be required to create additional strategic, industrial and economic benefit in the UK.

The ambition goes beyond simply directing more procurement spend towards British businesses. The policy is intended to use selected overseas acquisitions to strengthen sovereign capability, supply chain resilience, skills, innovation, exports and the growth of UK SMEs, while encouraging overseas suppliers to invest and grow their businesses in the UK.

For overseas defence contractors, UK suppliers and investors alike, this creates a new set of commercial and legal considerations.

Which procurements will be affected?

The default trigger is an acquisition worth £50 million or more, although this is not an automatic threshold. The MOD says offsets will be applied selectively to acquisitions where the expected strategic value justifies the additional cost and administrative burden, and it retains the ability to use a higher or lower threshold.

Nor is incorporation necessarily determinative. The policy may apply where a supplier is registered in the UK, but a significant part of contract value, production or value creation is situated overseas. Further guidance on what constitutes a UK-based company is due from the Offset Authority.

International treaties, multinational programmes and other government-to-government arrangements will also matter. The policy will not normally apply where industrial outcomes or workshare are already governed through such arrangements.

How will the obligation work?

Offset will ordinarily be governed through a separate Offset Agreement, cross-referenced in the principal procurement contract. The main acquisition contract will not be signed until an Offset Agreement, or an approved alternative, has been concluded.

The policy sets 100% of the procurement contract value as the standard Offset Agreement value, although the Offset Authority may impose a lower obligation having regard to factors including the strategic importance of the acquisition, overseas content, routes to value generation, market conditions and value for money.

Crucially, that does not necessarily mean a supplier simply has to spend an additional amount equal to the procurement value.

Approved activity will be valued and credited against the offset commitment, and the policy envisages the use of multipliers to incentivise activity generating particularly important strategic value.

Direct and indirect offsets

A particularly important distinction is between activity directly associated with the capability being purchased and wider investment in UK industrial capability.

Direct offsets can include additional UK support, sustainment, upgrades, technology transfer and workshare connected to the procured capability. The policy says that where direct offsets are required, they will be included and weighted within the procurement competition and a lower contract-value obligation communicated early in the process.

This makes offset relevant to procurement strategy from the outset, rather than just an obligation to be addressed following contract award.

The wider policy also seeks outcomes including inward investment, R&D and innovation, technology transfer, skills, industrial partnerships, exports and opportunities for UK SMEs and mid-tier companies.

Additionality will matter

The regime is not intended to reward overseas suppliers for activity they would have undertaken anyway.

One of the express principles of the policy is that credited activity must be additional to normal business and clearly causally linked to the offset requirement. Approved activity must also be capable of verification, valuation and crediting against documentary evidence.

This means businesses will need to think carefully not only about what activity they propose, but how they demonstrate its additionality and value.

 Opportunities for UK businesses

The policy should also be considered from the opposite side of the transaction.

Its stated objectives include expanding opportunities for UK SMEs, mid-tiers, primes, research organisations and academic institutions, increasing inward investment and technology transfer, and encouraging overseas suppliers to invest and grow in the UK.

UK defence and dual-use businesses should therefore consider how clearly they can articulate the capability, technology, capacity or investment opportunity they offer.

That does not mean that every UK defence business becomes an offset beneficiary. But it creates another reason for businesses seeking investment, supply chain opportunities or international partnerships to understand how their capabilities align with UK strategic priorities.

What should businesses do now?

The MOD has established the architecture, but important implementation details are still to come.

The new Offset Authority is responsible for implementation guidance and standard operating procedures, approving valuations, multipliers and credits, and maintaining the strategic priorities and value framework. The MOD expressly says that more detail on the Authority will be published before offsets are applied to procurements in 2027.

The immediate priority is therefore readiness rather than compliance.

International suppliers should begin considering where the policy could intersect with their UK pipeline and existing UK footprint. UK businesses should consider whether their capabilities, IP, capacity and investment requirements put them in a position to participate in future offset projects.

Both should be alert to the wider legal issues that particular structures may create, including procurement, corporate structuring, contractual arrangements, IP and technology transfer, competition and other applicable regulatory requirements.

The policy sets the direction. The next question is how businesses across the defence ecosystem position themselves to operate within it.