A New Era In Quid Pro Quo? The UK's Potential New Defence Offset Regime

What should we expect in return for spending billions on procuring defence capability from overseas?

For many countries, the answer has long been defence offsets - a requirement for foreign suppliers within the defence sector to deliver inward investment into the purchasing country (be it jobs, skills training, technology, know-how or industrial capability) alongside the military services or hardware that are being bought. In recent times, the UK has stood apart from this approach, but that may now change. A 2025 consultation under the Defence Industrial Strategy signalled a potential shift towards the introduction of a formal UK offset regime, raising some interesting questions about how defence procurement should balance sovereign capability, cost-efficiency, industrial growth and international trade obligations.

What are defence offset agreements?

Offset arrangements, which are sometimes referred to as "industrial participation policies", are defined as 'reciprocal economic exchange to offset economic outflows associated with spending taxpayers' money with offshore vendors'. They are a way to achieve secondary benefits when buying from overseas suppliers, and so are seen to:

• Offset politically unpopular decisions to spend taxpayer money on foreign goods and services, and
• Ensure that such decisions allow the UK to obtain the best/most cost efficient solution (where that means a purchase from abroad) whilst still boosting the UK economy.

Or, as the Defence Industrial Strategy (DIS) put it: "whenever we invest in overseas suppliers, we will ensure that the British economy is strengthened in return through new jobs and novel technologies".

The DIS stated that, subject to consultation, the plan is for a UK offsets regime to be launched in 2026. Following a 12-week consultation, Luke Pollard MP (Minister for Defence Readiness and Industry) used his keynote speech at DPRTE 2026 on 25 March 2026, to reconfirm the UK Government's interest in adopting an offset policy.

What happens in practice?

In practice, where the UK Government awards a defence contract to a foreign supplier, that company must (as a condition of being awarded the supply contract) create value within the UK equivalent to a percentage of the total sales awarded to it. Examples globally can range from 30% to 100% of the contract value.

There are two types of offset: direct and indirect. Direct offsets are benefits directly linked to the defence procurement, such as manufacturing the product within the local area. Indirect offsets, however, are not directly linked to the defence procurement itself but bring other benefits such as training programmes within the country or local area.

Offset credits

It is usual (in other countries that already have established offset regimes) for the inward investment to be measured in terms of "offset credits". Offset credits are earned in satisfaction of the offset obligation. While they are essentially a contractual/accounting construct, offset credits can be viewed as akin to a commercial asset with a financial value. Seeing them as such opens the door to recognising their wider value (as assets can be traded and form the basis of a marketplace). Using offset credits (and enabling a 'market' whereby companies with offset obligations use third parties to deliver services generating offset credits) has benefits for both Government and Industry:

• Companies can bid to be a supplier, even if they do not themselves have the capability to deliver direct or indirect offset, as they can generate offset credits via the services of another company that delivers, or is itself engaged as the deliverer of, the inward investment needed.
• Conversely, Governments can secure the type of inward investment they want even if their preferred foreign supplier does not have the capability sought. This is because the chosen supplier can engage another company to deliver the capabilities sought.
• Companies can negotiate the 'transfer value' of offset credits between themselves in the same way as they would any other asset – i.e. the value of the offset credits generated may differ from the amount paid to the party delivering them, or the payment may be through other non-financial consideration. This allows for commercial flexibility and opportunity.
• Awarding offset credits allows for the use of "multipliers" to encourage the types of inward investment most sought by the Government. While a simple £100,000 business investment may earn an equivalent £100,000 in offset credits, a Government that is interested in acquiring a specific capability might say that the transfer of such technology will earn offset credits several times their face value. For example, the provision of an intellectual property licence valued at £100,000 but relating to sensitive proprietary technology might be subject to a 10x multiplier generating £1m in offset credits.

We have yet to see if the UK Government will adopt such an approach.

Why now?

There are many reasons why the introduction of a formal offset regime in the UK is currently attractive:

• The shifting international political landscape has seen the introduction of more protectionist policies by many countries. This has opened the door to the consideration of such policies at home.
• The DIS was the chance for the UK Government to try new approaches, and its central promise was to make "defence an engine for growth". Offset was a natural means to that end. The DIS states an Offset Policy "will ensure that defence investment supports a resilient and competitive defence sector in the UK and brings economic benefit to all nations and regions of the UK".
• The UK has previously engaged in some offset-style arrangements. However, whilst there were some exceptions to the rule, offset arrangements were largely considered unlawful under the Defence Procurement Directive 2009/81 EC and that prevented such activity while the UK was a member of the European Union. Brexit has brought a change of circumstances. That being said, the Procurement Act 2023 has provisions concerning the non-discriminatory treatment of suppliers from countries with which the UK has trade agreements (and this will need to be taken into account by any future Offset Regime and any Offset Agreements).

How will UK industry benefit from an offset regime?

On the face of it, offset regimes might appear detrimental to the UK Defence Sector as they facilitate work being placed overseas. However, there are a number of opportunities that are generated:

• While it may be inevitable that supply contracts will be awarded overseas, an offset regime would ensure that where that occurs, there is a balancing investment into British industry. For example, the offset obligation might be discharged by the purchasing of supporting goods, services and human resource from the UK. This could support lower tier companies and SMEs.
• The creation of a UK 'offset market' creates new opportunities for UK businesses, who may have the capabilities to deliver goods and services that satisfy offset requirements.
• Where the inward investment takes the form of a technology transfer, the know-how and IP will need to be provided to UK businesses that are capable of exploiting it.
• There is currently a skills shortage in certain sectors in the UK. Where an offset takes the form of a technology transfer or creation of a UK based delivery solution, this will involve training a UK workforce.

How we can help

Womble Bond Dickinson has a well-established team of defence sector specialists who can provide support by:

• Advising on any UK offset policy and the pursuit of the commercial opportunities it creates
• Drafting offset agreements
• Drafting agreements for the supply of goods and services that are provide in satisfaction of offset requirements, and
• Advising on the Procurement Act 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.