Offsetting Defence Spend: UK Government publishes its new Offset Policy

Key Takeaways

1. Threshold: contracts of £50 million or more will be considered, but offset is not automatic. The MOD will apply it on a case-by-case basis, and only where it is lawful, proportionate and strategically justified.
2. Value: the default offset commitment is 100% of the contract value. This does not mean spending 100% in cash in the UK: offset credits depend on how activities are valued and on any valuation multipliers.
3. Offset Agreement: a separate offset agreement will normally be signed before the main contract. Specific projects for delivering offset can be agreed later.
4. Activities: offset can be direct (linked to the contract, such as workshare or technology transfer), indirect (wider support for UK defence, such as research and development or supply chain investment), or a mixture of both.
5. Delivery: contractors will normally have up to ten years to meet offset commitments, with milestones of 30% by year three, 50% by year five and 100% by year ten. These can be varied.
6. Breaches: missed milestones could lead to financial compensation (at least 10% of the shortfall), withheld credits or exclusion from future competitions.
7. Offset Authority: a new MOD team, the Offset Authority, will agree, value and monitor offset. Further guidance and standard agreements are still to come.

What is ‘offset’?

Offset is the means by which a government can require overseas contractors to invest back into the domestic economy, usually through technology and know-how transfer, industrial participation and investment, supply chain partnerships or export support. Similar regimes operate in Australia, Norway, Portugal, Poland and the Netherlands, among many other nations, but contractors should understand the nuances of the UK regime rather than rely on their experience of others.

The UK Offset Policy

What are the goals of the UK Offset Policy?

The Offset Policy aims to use selected defence imports to strengthen the UK defence industrial base, including sovereign capability, supply chain resilience, skills, innovation, investment, exports and SME growth. Offset activities should therefore be structured with these objectives, and the Offset Policy’s identified strategic priority areas for value generation, in mind.

What procurements will be caught?

The Offset Policy will apply to selected overseas acquisitions of equipment, services, upgrades, sustainment or other defence and security procurements by the MOD. The default trigger threshold will be a contract value of £50 million or more, which the MOD may raise or lower, and the policy will only apply where the MOD determines that applying offset is lawful, proportionate and strategically justified. The threshold may be assessed on a five-year aggregate basis, including additional procurements and options.

The Offset Policy is primarily aimed at overseas contractors, but may also apply where a UK-registered contractor locates or sources a significant part of the contract value, production or value creation from abroad. The policy defines a UK-based company as:

“a company that has a substantial and enduring UK footprint, undertakes a significant proportion of its relevant work in the UK, and demonstrates meaningful UK offset through its workforce, facilities, intellectual property, supply chain activity, tax and wider economic impact.”

Overseas contractors with a significant UK presence may therefore be less likely to be subject to offset requirements. The definition also points to a substance-based assessment, which matters for overseas contractors already producing or providing procured items from the UK.

Further guidance on the meaning of a UK-based company is to be issued. Key points to understand will be what constitutes a “substantial and enduring” UK footprint, a “significant proportion” of relevant UK work and sufficient UK economic contribution. This matters particularly for UK subsidiaries of overseas groups and UK-registered contractors with substantial overseas production.

The MOD’s discretion is key: it is not required to designate any procurement as in scope, and should apply the policy only where lawful, proportionate and strategically justified.

How are offset obligations established?

Where the MOD intends to apply the Offset Policy, the following steps will need to be complied with to properly establish offset obligations:

1. Early notification and acceptance: the MOD should signal intended application as early as possible, normally through procurement notices, pre-procurement materials and tender documents. Bidders must then confirm in writing that they will enter into an offset agreement, if selected.
2. Agreement before the main contract: a separate offset agreement, cross-referenced in the procurement contract, must normally be concluded before the MOD signs the main contract. An approved alternative arrangement is possible. Specific projects are expected to be agreed only at a later date after the value of the contractor’s offset commitment has been fixed. In practice it is likely that initial discussions on what projects will be delivered as part of any offset commitment will take place concurrently with discussions on the main contract.
3. Planning meeting: where the threshold and notification conditions are met, the contractor must meet the Offset Authority within three months of offset agreement signature to discuss its non-binding strategy and fulfilment plan.

The default offset commitment will be 100% of the procurement contract value (including where the original contract cost increases), although the MOD may set a lower level in certain circumstances. This does not necessarily require equivalent cash expenditure in the UK, as credited value will depend on the approved valuation methodology and any multipliers the MOD applies to incentivise and direct activities to priority areas. Much of the detail in this regard is yet to be determined, with the MOD expecting to publish guidance on targeted priority areas, eligibility criteria and multiplier criteria in due course.

Standard forms of offset agreement, conditional offset agreement and banking offset agreement are also awaited.

What offset activities can the UK Offset Policy impose?

The types of offset activities which can be undertaken under the Offset Policy include:

1. Direct offset: these are activities specifically associated with the product or service being acquired (e.g. additional onshore support, technology transfer, workshare, etc.).
2. Indirect offset: these are activities not directly tied to the procured capability, but that support the UK defence and security sector (e.g. supply chain integration, manufacturing capability, research and development, etc.).
3. Hybrid offset: a combination of both direct and indirect offset activities.

The activities undertaken should support the UK’s Defence Industrial Strategy and the goals of the Offset Policy, and must be approved in writing by the MOD in advance. Credit also requires activity to be additional to ordinary business and causally linked to the offset requirement, a test the Offset Policy leaves largely undefined, so it is unclear whether UK work already inherent in a contract, or done for other MOD programmes, could count.

How long do contractors have for offset to be delivered?

The normal fulfilment period will be up to ten years from offset agreement signature, although shorter or longer periods may be justified. Unless otherwise agreed, cumulative delivery milestones are to fulfil: (1) 30% of commitment by the end of year three; (2) 50% by the end of year five; and (3) 100% by the end of year ten.

What are offset credits?

Offset credits are the MOD’s formal recognition that an approved offset activity has delivered a specific amount of value. Credits will normally be awarded following delivery and verification, but “normally” is undefined and so it is unclear when contractors may seek credits in advance. The MOD also has discretion whether to accept credit claims, and the assessment methodology is yet to be determined.

Contractors may apply for a banking offset agreement to preserve, for future use, approved credits generated in advance of future commitments or excess credits from an existing commitment. Eligible activity categories, maximum credits and the expiry period will be specific to each agreement.

Credits may be transferable between group companies, and transfers to third parties may be approved in exceptional circumstances. As a general rule, transferred credits must not exceed 50% of the commitment under the relevant agreement.

The Offset Authority may advise the MOD and wider government on abatements, reciprocal undertakings or other mechanisms to reduce or remove offset requirements. How and when these will be used is unclear, but they may be particularly relevant to contractors from allied nations with which the UK has reciprocal defence procurement arrangements.

How are breaches of obligations handled?

Offset agreements, conditional offset agreements and banking offset agreements will be governed by the laws of England and Wales (or, where appropriate, Scotland or Northern Ireland) unless otherwise agreed, with disputes resolved in accordance with these agreements.

Failures to meet milestones, reporting or audit requirements or other material commitments may lead the MOD to, where lawful and proportionate, applying contractual remedies, including financial compensation, a requirement to provide an irrevocable bank guarantee, and the withholding or adjustment of credits. The MOD may also take such failures into account in future procurements and, for serious or persistent breach, exclude the contractor from future in-scope competitions until the breach is remedied.

Contractual disputes over the agreement itself may therefore be relatively straightforward. The harder question is how contractors could challenge the way the MOD exercises its considerable discretion, for example on whether offset applies, the level of commitment, project approval, valuation, credits and remedies, none of which the Offset Policy explains. As a policy rather than legislation, it creates no new statutory rights or remedies. Whilst the policy makes it clear that it “shall be applied in a manner consistent with the Procurement Act 2023”, it is difficult to see how the offset concept aligns with the requirements of that regime. In reality, therefore, offset is more likely to be used for exempt procurements. In turn, this is likely to mean that, unless the agreement gives a contractual route, challenges to Offset Authority decisions are likely to be confined to judicial review, which must be brought promptly and on established public law grounds such as illegality, procedural unfairness or Wednesbury unreasonableness: a high bar where decisions involve strategic and value judgements.

Compensation is a further uncertainty. Unless otherwise agreed, it will normally be at least 10% of the unfulfilled value at a missed milestone, with no ceiling or method stated, and penalties are described as a last resort. Payment extinguishes a “proportionate” part of the commitment, but it is unclear whether that means the amount paid or the full shortfall it relates to.

What should you do now?

If you bid for, or supply into, UK defence contracts worth £50 million or more, from overseas or with significant overseas delivery, you should: reflect on your UK footprint and consider whether it could take you outside scope; identify UK partners and projects that could generate offset credits; consider how to price offset commitments and possible compensation into future bids; and, most importantly, watch for further detailed MOD guidance including standard agreements, which we will also continue to update you on before April 2027.

Ultimately, what the regime means in practice for both UK and overseas defence businesses will depend on the forthcoming guidance and on how the MOD exercises its discretion. In particular, it remains to be seen whether overseas primes will continue to compete for, and fully deliver against, UK contracts on these terms, and whether UK companies will benefit through new partnering and supply chain opportunities.

How can we help?

The introduction of a formal offset regime will require careful structuring to balance legal compliance, commercial certainty and policy objectives. As this new policy takes effect in the coming months, our team can assist on:

• Offset commitments: advising on the specific details of offset requirements in procurement documents and offset agreements, whilst ensuring these align with UK procurement law and international trade commitments.
• Procurement design: advising on the integration of offset requirements into award criteria, whilst carefully reviewing potential overlap with social value requirements.
• Supply chain strategy: helping businesses position themselves to benefit from offset opportunities through subcontracting, technology partnerships and capability development.
• Contract negotiation: supporting prime contractors, subcontractors and authorities in negotiating offset obligations and considering how these commitments, as envisaged, tie into their core contracts.
• Risk management: advising on anti-bribery, corruption and competition law risks often associated with offset arrangements.
• Joint ventures and strategic partnerships: setting up joint ventures and strategic partnerships between overseas contractors and UK companies.
• Offset-related procurement complaints: helping bidders (whether overseas or UK-based) understand their rights in a formal procurement process where offset obligations play a part.

With deep expertise in defence procurement, international trade law and complex contracting, we can help clients navigate this evolving landscape and maximise opportunities under the new offset regime.

For more information on offset in the UK, contact

1. Mike Turner
2. Chris Murray
3. Helen Amison
4. Harry Robinson

Further reading on offset in the UK

1. UK Defence Offset Agreements: Government signals a step change
2. UK Offset Policy - GOV.UK