British manufacturers have urged the government to ensure that small and medium-sized businesses are major beneficiaries of the UK’s rising defence spending by embedding legally binding offset agreements in future military procurement contracts.
Ahead of the release of the government’s revised Defence Industrial Strategy, MakeUK Defence — the trade body representing more than 600 UK defence manufacturers — is calling for foreign contractors to be required to reinvest the vast majority of their contract value back into the British economy.
Offset agreements, which are already commonplace in over 50 developed countries, compel foreign companies that secure military contracts to invest a portion of the contract value locally — either directly in defence-related production, or indirectly in the wider economy. Advocates say such agreements can create thousands of high-skilled jobs and help to secure a sustainable domestic industrial base.
“Securing inward investment in defence deals should be a pillar of the government’s growth agenda,” said Andrew Kinniburgh, director-general of MakeUK Defence. “British SMEs have huge capabilities and the MoD must harness that so they too benefit from defence contracts with overseas companies.”
The UK’s current approach to offset is largely informal, with no formal obligation or enforcement mechanism in place. MakeUK Defence is calling for this to change, arguing that Britain is falling behind international rivals in securing industrial benefits from defence procurement.
As part of its recommendations, MakeUK is calling for a legally binding requirement that foreign firms winning MoD contracts reinvest between 75 per cent and 90 per cent of the economic value of those contracts into the UK over a ten-year period. This could include establishing or expanding manufacturing sites, investing in supply chains, or supporting technology transfer and training.
Such a policy, the group argues, would be particularly valuable for the UK’s network of small and mid-sized defence manufacturers, as well as adjacent industries such as automotive, aerospace, and oil and gas, which possess relevant capabilities but currently struggle to access defence supply chains.
The proposal also includes a call for regional prioritisation to support the government’s levelling-up agenda. Kinniburgh said offset investment could be “harnessed to bolster a regional growth strategy,” with a focus on historically under-supported areas such as the northeast and West Midlands.
Currently, small and medium-sized firms receive only 25 per cent of the UK’s annual defence spending, according to Ministry of Defence figures — just 4 per cent directly from the MoD and 21 per cent indirectly via prime contractors.
In contrast, countries such as Poland and the Gulf states have leveraged offset agreements to secure long-term inward investment, military training, and advanced technology transfer as part of major purchases of fighter jets, missile systems, and other equipment.
The call for change echoes recent comments from Prime Minister Sir Keir Starmer, who told the London Defence Conference that it was time to “seize the defence dividend” and ensure that military investment was “felt directly in the pockets of working people”.
While the UK has pledged to increase defence spending from 2.3 per cent to 2.5 per cent of GDP by 2027 — and potentially to 3 per cent in the next Parliament — industry leaders say that without targeted industrial policy, much of that increase risks flowing abroad.
MakeUK’s proposals would represent a significant shift in UK procurement strategy, bringing it in line with international norms and offering a potential boost to Britain’s high-tech manufacturing base.
“The UK needs to stop viewing defence spending as an isolated cost and start treating it as a long-term investment in industrial capability, regional regeneration and national security,” Kinniburgh added. “A robust, enforceable offset policy is one of the simplest and most effective ways to achieve that.”