UK Gov launches consultation on an offsets regime for the defence sector: time to have your say.

On 23 October 2025, the UK Ministry of Defence (MOD) launched an open consultation seeking views from the market on a potential new ‘offsets’ regime for defence procurement, as part of the ongoing Defence Industrial Strategy (DIS) (see our previous blog on what the DIS might mean for public procurement: here). 

Offsets, sometimes referred to as ‘industrial participation policies,’ are reciprocal arrangements imposed by the purchasing country on foreign contractors — a practice with a long history in international procurement markets and already adopted by some NATO-aligned nations.[1] As highlighted in the consultation, such arrangements typically involve commitments from the foreign contractor to channel investment, technology, jobs or production into the procuring country — in this case, the UK.  

Introducing an offsets regime would mark a significant shift in how the UK integrates both national security and economic objectives into its defence procurement strategy, with the stated aim to “create opportunities for firms to enter global supply chains, boosting the domestic industrial base, creating jobs and supporting economic growth” (DIS, p. 50).  The proposed offset regime contemplates foreign contractors investing in UK capabilities — such as local suppliers, technology and workforce — thereby supporting UK defence companies and facilitating their involvement in the delivery of cross-border collaborative projects.  In this way, the policy is intended to expand the presence of UK companies within the global defence supply chain.

What is the market being asked? 

To assess whether the UK should introduce an offsets regime for defence procurement, as part of the DIS, the MOD is asking stakeholders three questions:

1. What are the benefits and risks of introducing an offsets regime in the UK?
2. What are the opportunities for greater international collaboration from introducing a UK offset policy.  What can be learned from the offset policies of other countries?
3. How would the introduction of an offsets policy impact the defence market in the UK?

MOD highlights several factors that will shape the design of any offsets regime, including: 

• Scope:  MOD is considering applying the offsets regime to sectors critical to national security or with significant potential for UK economic growth.  It indicates there could be flexibility in determining which kinds of contracts fall in scope (by reference to type of procurement, financial threshold and country of origin).  MOD’s language is outcomes focussed: a key component of a successful regime would include UK job creation, UK workshare and use of UK SMEs in supply chains.  The messaging is consistent with the DIS: defence procurement will be used to reinvigorate the UK industrial base.
• Form of offsets:  The consultation seeks feedback on both direct offsets — where requirements are linked to the specific project, such as UK-based manufacturing or technology transfer related to the defence product — and indirect offsets, which involve broader obligations on the foreign contractor, such as investing in unrelated R&D, university partnerships or wider supply chain improvements.
• Value of offsets:  While offset agreements typically specify the offset value, the consultation does not mention any specific value ranges.  Instead, it notes that the UK’s approach may provide guidance or set requirements on the “nature and level of the obligation.” 

The consultation closes on 23 December 2025, with ministers aiming to use its findings to decide both whether to proceed and what the key design principles of any future regime should be.  Subject to the outcome of this consultation, the UK’s National Armaments Director, Rupert Pearce, will be responsible for implementing the new offsets regime by the first half of 2026.

Legislative and Policy Backdrop

While a formal offsets regime would represent a new direction for the UK, it would build on the existing practice of encouraging foreign contractors to invest in the UK.  Until 2010, the UK Trade and Industry Defence Sales Organisation (now UK Defence and Security Exports) operated an Industrial Participation policy, requiring foreign contractors to demonstrate how their bids would benefit the UK economy.  This policy was discontinued following the EU’s 2009 Defence Procurement Directive, which restricted the use of explicit offsets arrangements. 

However, the Directive's restrictions on explicit offsets were not universally adopted by all EU Member States.  Some, such as Poland and the Netherlands, continued to implement offset regimes relying on the exception under Article 346 TFEU — which permits Member States to take measures to protect essential security interests even if they diverge from EU laws like the Defence Procurement Directive.

Instead of implementing an explicit offset regime, the UK has in the past relied on a voluntary partnership model with foreign contractors, such as the 2012 Defence and Security Industrial Engagement Policy (DSIEP), which required foreign contractors to submit annual reports detailing any investments in the UK, without necessarily requiring such investments.[2] 

If the new offsets regime is introduced, the DIS seeks to potentially formalise and make explicit the requirement for foreign contractors to invest in the UK. This is with a view to positioning the UK as a “leading tech-enabled defence power by 2035,” and making defence an engine for growth while safeguarding national security amid evolving global threats (DIS, p. 9). 

In exploring how these aims might be achieved, the MOD’s consultation points to examples from Australia, Norway and South Korea — where offsets regimes have been adopted to advance similar national security and economic objectives.  For instance, Australia’s approach balances sovereign capability development with strategic international partnerships, enabling the emergence of advanced technologies such as Boeing Australia’s MQ-28 Ghost Bat — the country’s first sovereign unmanned aerial system (UAS).

Risks and International Implications

Any assessment of a potential offsets regime must consider the inherent risks, both in terms of potential responses by trading partners and disruption to the existing UK defence industrial base and whether in that context they can in fact achieve the stated aims. 

Offsets are often perceived as an added ‘tax,’ potentially increasing costs for foreign contractors seeking to bid for UK contracts.  This perception creates geopolitical risks, particularly as the US maintains a close eye on barriers to US companies’ market access, and has been especially critical of offsets regimes for the past several decades — describing them as “economically inefficient and market distorting.”  And there is some concern that offsets can be used to extract valuable intellectual property from the US defence industrial base.  There is a risk that a UK offsets regime could trigger reciprocal measures from other nations, potentially disadvantaging UK defence companies seeking to export.  While the US accepts offsets as a fact of life for international defence sales, US firms that enter into defence-related offset agreements exceeding USD 5 million with foreign governments are required to report such agreements to the US Bureau of Industry and Security.  While the US does not demand offsets as a condition for participation in US procurements, a significant increase in offsets demanded of US companies could conceivably become a factor in broader trade and diplomatic relations.  

Offsets have also been criticised as enabling corruption, with Transparency International noting that “in many countries, there is almost no due diligence on potential improper beneficiaries from the offsets, no monitoring of performance on offset contracts, no audits of what was delivered compared to the pledges, and no publication of offset results, benefits or performance at all” making offsets “an ideal playground for corruption”.[3] 

For UK policymakers, any offsets regime will therefore need to balance the need to achieve  national economic and industrial objectives without deterring vital international participation or triggering unintended geopolitical consequences, such as the potential for foreign prime contractors to introduce new supply chains or capabilities that inadvertently displace existing domestic suppliers.  Similarly, it will be important for the UK to ensure that transparency is a cornerstone of any offsets policy.

What Does This Mean for UK Defence Contractors?

For UK defence contractors — prime and SME alike — this consultation and any resulting policy development is highly significant.  Recognising the risks and the divergent views on possible disadvantages if adopted, an offsets regime could:

• Increase domestic opportunities:  Overseas primes winning UK contracts may be required to partner with or invest in UK suppliers, widening potential subcontracting opportunities for local businesses.
• Drive technological collaboration:  The regime may incentivise international technology transfer, co-production and innovation partnerships with UK firms, as foreign defence contractors seek to meet offset obligations by investing in UK-based research, development and manufacturing activities.
• Boost SME involvement:  Policy design is likely to focus on enhancing SME participation specifically in defence procurement projects, strengthening supply chain resilience, and broadening the base of skilled defence industry talent.  This would align with priorities set out in the National Procurement Policy Statement (NPPS), which emphasises opportunities for SMEs and innovation in public procurement.
• Set new compliance expectations: UK companies may need to adapt to new contractual obligations passed down by foreign prime contractors seeking to fulfil offset requirements — such as working to deliver specified UK investment, supporting agreed levels of UK workshare, providing regular progress reports, and adhering to performance standards tied to offset compliance.

Defence contractors should closely examine their current operating models, supply chains and capabilities in light of these possible changes, and engage actively in the consultation process.  MOD has emphasised evidence-led, proportionate development and is ultimately seeking input to ensure any regime delivers “maximum value for the UK economy and defence sector.”

Planning Ahead for Foreign Defence Contractors

Investments arising from offsets can also be navigated to deliver tangible value for foreign defence contractors, including potential eligibility for UK contracts as a ‘domestic’ contractor.  In this regard, some early planning considerations for foreign contractors include: 

• Local partnerships and collaboration: Joint ventures or consortiums with UK businesses formed as part of offsets investments can be leveraged to help foreign contractors qualify for specific UK defence programmes, including potential access to dedicated funding.  Robust governance frameworks and careful structuring of joint ventures will be essential to ensure both eligibility for these initiatives and effective operational alignment.
• Foreign investment and export controls: Common offsets commitments — such as establishing joint ventures or entering into licensed production agreements — can trigger regulatory regimes like the UK’s National Security & Investment Act (NSIA) for inward investment screening, and the US’ International Traffic in Arms Regulations (ITAR) for the transfer of controlled technologies.  Navigating these regimes requires careful planning and expertise.
• Antitrust:  Offset arrangements are subject to UK and EU competition law scrutiny.  While the UK Government’s Strategic Steer to the CMA signals a more pro-growth approach, certain offset strategies — such as joint ventures or collaborations with UK businesses — may still trigger the UK merger control regime and require ongoing compliance with antitrust regulations.
• Compliance training and internal controls: As above, negotiating and fulfilling offsets can create heightened risk for bribery and gratuities.  Companies participating in these arrangements should ensure their compliance systems and training are adequately tailored to minimise the risk associated with investigations and enforcement. 

Get Involved

This consultation marks a pivotal moment in shaping the future landscape of the UK defence market.  For both domestic and foreign contractors, it brings strategic opportunities and new challenges.  Active engagement now will be key to influencing how the proposed offsets regime helps build a more resilient, competitive and sovereign UK defence industry.