Overseas defence suppliers face new UK offset requirements

The new policy marks a significant shift in UK defence procurement, according to experts at Pinsent Masons.

The policy would allow the Ministry of Defence (MoD) to require non-UK suppliers awarded relevant contracts valued at £50 million or more to enter into separate offset agreements to deliver benefits equal to 100% of the value of that contract to the UK economy, where the MoD is legally permitted to do so. Those benefits could include investment, skills development, innovation activity, supply chain participation and support for UK industrial capability.

The government said that the policy would ensure British workers and businesses still benefit where it is unable to source defence contracts domestically.

It is expected to apply from April 2027, and will be considered on a case-by-case basis.

Defence industry expert Andrew Brydon of Pinsent Masons said: “The announcement highlights the government’s focus on ensuring that defence expenditure delivers both military capability and long-term economic benefits for the UK.”

“The practical impact will depend heavily on implementation detail, including how commitments are assessed, measured and enforced. Organisations bidding for or supporting defence programmes should begin considering the implications for procurement strategies, industrial participation plans and UK partnership arrangements,” he said.

While the offset approach is new to the UK, similar requirements are already well established in other global markets. Countries including Norway, Poland and the Netherlands have operated comparable regimes for many years as a means of securing broader economic benefits from overseas defence spending.

The announcement comes against a backdrop of increased defence spending, defence industrial growth initiatives and wider procurement reform. The government has spent over £35.2 billion, or 11% of total MoD direct expenditure, on defence contracts and services with overseas partners since 2016, according to its own figures. It has set a target of 3% of GDP spend on defence by 2030, ahead of a NATO target of 3.5% GDP by 2035

The government said that it would notify suppliers subject to offset requirements “early and clearly”. Additional details on how obligations will be assessed, measured and enforced, along with discussion of the government’s wider defence procurement reforms, are expected at the Defence Investment Summit, scheduled for 1 December.

Public procurement expert Totis Kotsonis of Pinsent Masons described the new policy as a “significant” change.

“It will apply to certain large, strategically important procurements which the MoD has identified as having the necessary expected industrial, capability or economic value to justify the additional administrative burden – of assessing and ensuring the supplier’s compliance with its offset commitments – and the potential cost premium that the supplier may add to the main contract,” he said. “Whilst the policy does say that the MoD may set a lower offset percentage, and multipliers may potentially be available to reduce this even further, 100% is the default position and a significant one at that.”

“The policy expressly applies only where the MoD can lawfully require offsets, subject to the UK’s domestic and international obligations. EU suppliers could therefore face offset requirements in qualifying procurements.  That could complicate the UK’s efforts to secure favourable treatment for its industry under the EU’s wider ‘Made in Europe’ agenda, including the proposed Industrial Accelerator Act, and to negotiate wider access under the EU’s Security Action for Europe (SAFE) programme, the €150bn loan programme designed to support defence procurement. Any tension would, however, depend on the particular access conditions and reciprocal commitments involved.”

“In defence procurement, offsets are not inherently incompatible with European cooperation: Poland and the Netherlands operate offset or industrial participation policies, while Norway maintains industrial cooperation requirements alongside its favourable treatment under SAFE as an EEA-EFTA country. The UK’s different legal relationship with the EU nevertheless means that it cannot assume equivalent access.”

“The significance will therefore depend on how the UK applies the policy and the terms of any agreements it reaches. The policy itself leaves room for cooperation by normally excluding programmes whose workshare or industrial outcomes are already governed by international arrangements,” he said.