30th October 2026
A new Government policy could change the way Britain buys military equipment from overseas, requiring foreign defence contractors to deliver economic benefits in return. Scottish manufacturers and smaller engineering businesses could be among those to benefit.
The UK Government has announced a significant change to the way it awards major defence contracts to overseas companies. Under a new policy, foreign suppliers winning selected contracts worth more than £50 million could be required to generate economic benefits in Britain worth up to the full value of the contract.
The policy, announced on 30 October 2026 by the Chancellor and Defence Secretary during a visit to BAE Systems' Scotstoun shipyard in Glasgow, is intended to ensure that increasing defence expenditure also supports British employment, manufacturing, technology and skills.
The principle is relatively straightforward. If Britain has to buy military equipment from an overseas manufacturer, the economic benefits should not end with the delivery of the equipment. The supplier should also contribute to Britain's industrial economy.
What exactly is changing?
The new arrangements are known as a defence offsets policy.
They will apply to selected overseas defence procurement contracts worth more than £50 million, with implementation beginning in April 2027.
The requirements will be considered on a case-by-case basis. They will not automatically apply to every foreign supplier or every contract.
Depending on the agreement, an overseas contractor could be required to:
Create jobs and apprenticeship opportunities in Britain.
Establish new manufacturing facilities or expand existing factories.
Invest in British companies supplying components and specialist services.
Transfer technology, technical knowledge and expertise to British businesses.
Increase the use of British-made components in equipment supplied to the armed forces.
The potential scale of the obligation is considerable. A foreign company winning a £100 million defence contract could be required to generate economic benefits in Britain worth up to £100 million.
This does not mean that £100 million has to be paid directly to the Government. The obligation could be met through a combination of investment, employment, training, manufacturing capacity and support for British suppliers.
A new central Offset Authority will oversee the arrangements, agree the commitments and monitor whether companies deliver what they have promised.
Why is the Government introducing this policy?
Britain has spent substantial sums purchasing military equipment and services from overseas manufacturers.
Government figures show that more than £35.2 billion was spent with overseas defence suppliers during the ten years from 2016/17 to 2025/26. This represented approximately 11% of the Ministry of Defence's direct spending with industry and commerce.
The Government argues that this expenditure should provide greater benefits to the domestic economy.
There is also a wider strategic consideration. Recent conflicts have demonstrated how important it is for countries to maintain the ability to manufacture, repair and maintain essential military equipment.
Dependence on overseas suppliers can become a problem during international emergencies, particularly when supply chains are disrupted or governments place restrictions on exports.
Building domestic manufacturing capacity is therefore not simply about creating jobs. It is also about national security and ensuring that Britain can maintain its armed forces during a prolonged period of international tension.
Scotland has a considerable interest
Scotland is already an important part of Britain's defence manufacturing industry.
The Government estimates that Scotland's defence economy is worth approximately £2.5 billion and directly supports around 12,200 jobs.
The announcement itself was made at BAE Systems' Scotstoun facility in Glasgow, underlining the importance of Scottish manufacturing to the defence industry.
There are other significant examples.
The £10 billion agreement for Norway to purchase Type 26 frigates is expected to support around 2,000 jobs locally. The ships are being built on the Clyde.
Meanwhile, a £453 million contract for Typhoon radar systems supports approximately 300 jobs in Edinburgh.
These projects demonstrate that defence contracts can support much more than the main manufacturer. They also generate work for engineering businesses, electronics specialists, component manufacturers, technology companies and other suppliers.
The new policy could extend those opportunities by encouraging overseas contractors to establish partnerships with Scottish businesses.
Could the Highlands benefit?
The immediate opportunities are likely to be concentrated around established defence manufacturing centres such as Glasgow and Edinburgh. However, there is no reason why the benefits should be restricted to the central belt.
The Highlands has engineering expertise, technical businesses and a workforce with experience in energy, construction, electrical systems and specialist manufacturing.
Some of these skills are transferable to defence-related work.
For example, businesses involved in precision engineering, fabrication, electronic systems, software, communications, maintenance and specialist components could potentially become suppliers to larger defence contractors.
There may also be opportunities associated with research, testing, training and the maintenance of equipment.
However, becoming part of a defence supply chain is not straightforward. Companies must meet demanding quality, security, reliability and certification requirements. Smaller businesses may need help to understand procurement procedures and demonstrate that they can meet those standards.
This is where organisations such as Highlands and Islands Enterprise and the wider Scottish business support network could have a useful role in identifying potential suppliers and helping them prepare for opportunities.
Will foreign companies actually invest in Britain?
There are some important questions about how the new arrangements will work in practice.
An overseas manufacturer may be willing to establish a British factory or invest in local suppliers, particularly if it expects to secure further contracts in the future.
However, some companies might prefer to meet their obligations through training programmes, technology transfers or relatively limited partnerships.
The Government will therefore need to establish clear rules for valuing these contributions and ensuring that commitments represent genuine additional economic activity.
It will also need to monitor performance over several years. Announcing an investment is one thing. Delivering the promised jobs, facilities and training is another.
There is a further issue concerning value for money. Defence procurement must still provide the armed forces with suitable equipment at a competitive price.
If offset requirements make overseas suppliers less willing to bid, or encourage them to increase their prices, the taxpayer could ultimately bear some of the cost.
The Government will have to balance industrial policy with the practical requirement to equip the armed forces.
A change in how Britain thinks about defence spending
The new policy reflects a wider change in thinking about Britain's defence industry.
For many years, defence procurement was primarily concerned with buying the equipment required by the armed forces. Increasingly, ministers are looking at the wider economic and industrial consequences of those decisions.
With defence spending rising, there is an opportunity to strengthen British manufacturing, develop technical skills and create longer-term employment.
The important question will be whether this translates into sustainable businesses and well-paid jobs rather than temporary investment announcements.
For Scotland, which already has a substantial defence manufacturing base, the policy could provide further opportunities. For the Highlands, the challenge will be ensuring that smaller engineering and technology businesses are not left outside the supply chains simply because they are located some distance from the main defence manufacturing centres.
The new rules do not guarantee investment or jobs in every region. But they create an opportunity to make sure that more of the money Britain spends on defence circulates within the British economy.
That is a principle worth watching as the new arrangements come into operation in April 2027.