Six legal considerations for businesses entering the defence sector

The Ministry of Defence's recently published SME Action Plan presents a significant opportunity for innovative businesses seeking to enter the defence sector. As defence capability becomes increasingly driven by emerging technologies, digital solutions and rapidly evolving operational requirements, the Ministry of Defence is seeking to engage a broader range of suppliers that can innovate and adapt quickly. SMEs are often at the forefront of this innovation, bringing specialist expertise, novel technologies and the requisite agility to respond rapidly to changing requirements. With a commitment to increase spending with SMEs by £2.5 billion by 2028, the Ministry of Defence is actively looking beyond its traditional supplier base and encouraging greater participation from technology and manufacturing businesses.

Key takeaways from the SME action plan

• The Ministry of Defence has committed to increasing SME spend by £2.5 billion by 2028, creating new opportunities for innovative suppliers.

• The Ministry of Defence is seeking to broaden participation in the defence industrial base and reduce barriers to entry for new suppliers.

• Defence opportunities are no longer limited to traditional defence contractors, with technology, manufacturing, cyber, AI and engineering businesses increasingly in demand.

• Many SMEs will access the defence market through prime contractor supply chains.

• SMEs should familiarise themselves with and ensure they meet any requirements in respect of intellectual property, cyber security, export controls and security before bidding for defence work: businesses that prepare early and invest in compliance will be better placed to secure contracts and build a sustainable presence in the defence sector.

Why businesses outside the traditional defence sector should pay attention

The defence sector is increasingly being viewed as a growth market for businesses operating in technology, engineering, manufacturing, software, drones, cyber security and artificial intelligence. Many of the technologies shaping modern defence capability originate outside the traditional defence industry, as defence increasingly relies on rapid technological advancement to address evolving threats. The specialist expertise of many SMEs in these areas, coupled with their ability to innovate quickly and respond rapidly to changing requirements, makes them particularly well placed to support the delivery of capability at pace. The SME Action Plan reflects the Ministry of Defence's recognition that SMEs will play an increasingly important role in supporting the UK's future defence needs and driving innovation across the defence supply chain.

Preparing for success

Whilst the SME Action Plan seeks to increase SME participation, businesses entering the defence sector should not assume that procurement requirements will be relaxed. Defence contracts continue to operate within a highly regulated legal and security framework. By understanding these requirements and investing early to address any capability or compliance gaps, SMEs can position themselves as credible suppliers and avoid delays once opportunities arise.

Before bidding for defence work, SMEs should carefully consider the following legal and compliance issues.

Six legal considerations for SMEs before entering the defence sector

1. Intellectual property: Who will own or control your technology once the project ends?

Intellectual property is often a business's most valuable asset, particularly for many SMEs where it represents their primary source of competitive advantage. As MOD seeks to attract innovative businesses, understanding how defence contracts deal with ownership and licensing rights becomes particularly important.

Defence customers may seek extensive rights to use, modify or share technology across government departments and delivery partners.

Businesses should carefully review ownership provisions, licensing arrangements and the treatment of background intellectual property. Failure to address these issues early can diminish the long-term value of proprietary technology.

2. Cyber security: Can your business meet defence-grade security requirements?

Cyber security is often one of the first compliance hurdles faced by new entrants to the defence supply chain.

Cyber security obligations in defence contracts are often more demanding than those encountered in commercial markets. Businesses may need to comply with Cyber Essentials Plus, the Cyber Assessment Framework and Ministry of Defence-specific security requirements. Increasingly, these obligations are contractual as well as technical, and failure to comply can affect eligibility for defence work.

3. Export controls: Does your technology require an export licence?

Many products, software applications and technologies used in defence programmes may be subject to export control restrictions.

Export control compliance should be assessed at an early stage, particularly where businesses are working with overseas partners, international supply chains or technologies with potential military applications. Failure to do so can result in delays, contractual disruption, reputational damage and, in some circumstances, criminal penalties.

4. Supply chain obligations: What risks are being flowed down from the prime contractor?

Although the SME Action Plan seeks to increase opportunities for SMEs to engage directly with the Ministry of Defence many SMEs will enter the defence market through prime contractors as part of their supply chains. This often brings flow-down obligations relating to performance standards, security requirements, audit rights, compliance obligations and reporting requirements.

Prime contractor terms can transfer substantial risk. SMEs should therefore ensure they fully understand both the obligations being imposed and whether they have the operational capability to comply with them before signing up.

5. Security clearance and information handling : Do you have the people and processes needed to access sensitive information?

Many defence projects involve sensitive information, secure facilities or controlled assets. Businesses and personnel may need security clearances and robust information management procedures before work can commence.

Businesses should assess whether they have the necessary organisational processes, personnel screening arrangements and data handling procedures in place. For many new entrants, these requirements represent one of the most significant barriers to participation.

6. Defence procurement and contracting: Is your business ready to contract with government?

For many SMEs, one of the biggest challenges is understanding how defence procurement and contracting operate. While some businesses may contract directly with the Ministry of Defence through formal procurement processes, many will enter the sector through prime contractor supply chains. In either case, suppliers will need to navigate procurement and contractual frameworks that often differ significantly from those encountered in commercial markets.

Defence procurements are subject to legislative, transparency and governance requirements, and defence contracts frequently contain provisions relating to security, intellectual property, audit rights, supply chain compliance and information management that may be unfamiliar to new entrants. In many cases, there may be limited scope to negotiate these terms. Businesses will also often be expected to have appropriate policies, procedures and governance arrangements in place before they can participate credibly in defence opportunities.

Businesses should therefore ensure they understand the commercial and contractual requirements of defence work and assess whether they have the necessary processes, resources and compliance measures in place to meet them. Failure to do so may hinder their ability to compete effectively for opportunities or successfully establish themselves within the defence supply chain.

Conclusion

The SME Action Plan sends a clear message that the government aims to broaden participation in the defence supply chain and diversify the defence industrial base.

For innovative SMEs, the opportunity to enter the defence sector has arguably never been greater. However, defence remains a highly regulated market with unique contractual, security and compliance requirements. Businesses that prepare early and understand those requirements will be best placed not only to win work but to build a sustainable presence in the defence sector.

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