UK government proposes changes to scope of National Security and Investment Act

Investment security rules under the National Security and Investment Act 2021 (NSIA) will be simplified to ease the burden on businesses while maintaining national security rigour as part of the government's Plan for Change.

Simplification changes were first mooted in spring 2024, but were delayed when there was a change of government last year. See this earlier Insight for more on the original proposed amendments. The government has now confirmed certain changes will be made.

The Cabinet Office also opened a consultation on 22 July on proposed amendments to the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (NAR).

The consultation, set to run until 14 October 2025, is on updating sectors within the scope of the legislation. Currently, acquirers in 17 sensitive sectors must notify the Cabinet Office’s Investment Security Unit (ISU) of relevant acquisitions of shares (or votes) in a qualifying entity before completing the deal. These sectors were defined in 2021 and have not been updated since (read more about the areas that were under consideration last year). The consultation draws from the conclusions of a statutory report the chancellor of the Duchy of Lancaster, leading the Cabinet Office, published in December 2024.

Contemporaneously, the government published its 2024/2025 Annual Report on the NSIA regime.

Proposed changes to acquisitions subject to the rules

The upcoming agreed changes will reduce unnecessary bureaucracy for businesses by eliminating the need to notify the ISU about certain internal reorganisations or the appointment of liquidators, special administrators and official receivers. The announcement does not mention Scots law pledges or exemptions relating to public bodies which were previously flagged for consideration.

Analysis by the government has indicated that these transactions seldom require investigation. Streamlining the rules will lessen the regulatory burden and enable the government to concentrate on deals that pose a higher risk to national security.

Regulations will be published in due course to effect the changes.

Changes to sectors

The consultation covers the same ground as proposed in 2024 and seeks opinions on proposed changes to the NAR, which would:

• Establish new standalone mandatory areas for Critical Minerals and Semiconductors. Currently included under Advanced Materials, Semiconductors would merge with the Computing Hardware area, and the scope of both areas would be updated.
• Implement changes or clarifications to the scope of Advanced Materials, Artificial Intelligence, Communications, Critical Suppliers to Government, Data Infrastructure, Energy, Suppliers to the Emergency Services, and Synthetic Biology to ensure these areas are current. In particular: the AI sector is being amended to remove cases where "off the shelf" AI is being used as toll within internal processes; the Energy sector is being amended to include a new threshold for mandatory notification where an acquisition leads to the purchaser's UK capacity exceeding 500MW; and the Critical Suppliers to Government sector is being tightened up so that it relates only to contracts with specified ministerial departments, as opposed to any public sector body as presently drafted.
• Introduce Water as a new area requiring mandatory notification. This would apply to companies with statutory powers and duties to supply water or sewerage services to premises within their appointed areas under the Water Industry Act 1991. It would not include companies operating solely as retailers in the non-household retail water market. This is not expected to affect large numbers of deals, but reflects increasing risks to the sector’s resilience.

The proposals were formulated in response to business feedback, and aim to enhance clarity and update the sectors to reflect the latest economic and technological advancements. The changes would increase the number of mandatory areas covered to 19 but would introduce only one new area, being Water.

The proposals are expected to have a minimal overall impact on notification volumes.

Annual report

During the last financial year, the ISU received a total of 1,143 notifications, an increase of over 25% compared to the previous year.

Reviews were completed for 1,079 notifications, with 95.5% resulting in no further action and only 4.5% being called in (broadly consistent with the previous year). In addition to the 49 notified acquisitions called in during the reporting period, seven non-notified acquisitions were issued with a call-in notice meaning in total, 56 acquisitions were called in for further assessment, 16 were issued with final orders allowing them to proceed under specific conditions, and just one was ordered to unwind.

Conditions included:

• requirements relating to corporate governance, including composition of, and decision-making relating to company boards, the establishment of board committees to cover national security, and including UK national security vetting clearance for certain board members;
• notification of changes of business, transfer of assets including intellectual property;
• restrictions on the development of certain technologies or of technologies in partnership with countries outside an approved list;
• restrictions on procurement of items from non-approved jurisdictions;
• management of aspects of business to be subject to Cabinet Office approval;
• control of data, confidential information, expertise intellectual property rights and requirements relating to IT equipment;
• compliance with contractual requirements relating to security;
• ensuring supply of products to the UK government or continued provision of the business;
• restrictions on the location of business or requirement for business to continue in the UK;
• restrictions on business travel, and visits to sensitive business sites.

Types of notifications

Of the 1,143 notifications received, 954 were mandatory notifications, 134 were voluntary notifications, and 55 were retrospective validation applications (applications for notifiable acquisitions to be recognised retrospectively as being valid in law after they have been completed without approval).

Sectors

The Defence sector accounted for the largest proportion of notifications, either accepted or rejected, at 56%. This was followed by Critical Suppliers to Government at 21% and Military and Dual-Use at 19%.

The largest proportion of final orders was associated with acquisitions in the Defence area of the economy (37%), followed by Military and Dual-Use (34%) and Advanced Materials (29%) and Artificial Intelligence (29%).

Location of acquirer

The largest number of final orders involved acquirers associated with the United Kingdom (11 final orders), followed by acquirers associated with China (seven final orders) and acquirers associated with the United States of America (three final orders).

Timings

All reviewed notifications were either called in or cleared within the statutory period of 30 working days. Call-in decisions took on average 29 working days for both mandatory and voluntary notifications. On average 24 working days were needed to issue a final notification and 70 working days to issue a final order, from the point an acquisition was called in.

Osborne Clarke comment

The changes to exclude intra-group reorganisations and certain insolvency appointments from the rules are very welcome. They will take a number of situations outside of the requirement for compliance, ensuring deals and appointments can occur more quickly and easily.

The clarifications to certain of the sectors, most notably Artificial Intelligence, Energy and Critical Suppliers to Government, are useful and will provide greater legal certainty. However, the changes as proposed will not lead to a material reduction in the total number of NSIA filings required, as many had hoped. The government still expects to be receiving around 1,000 mandatory notifications every year even after these changes are implemented.

We expect that the changes outlined above will come into effect by the end of 2025 or early in 2026, but this will depend on the level of feedback to the current consultation, which closes in October.