UK National Security & Investment Screening: A More Business-Friendly Future?

A critical opportunity for investors and businesses to engage as enforcement levels increase

Almost four years since the National Security and Investment Act came into force, the UK government has launched a series of reforms and updates including a wide-ranging consultation on the mandatory notification sectors.  The proposals are intended to take some deals out of mandatory notification obligations where national security risks are low, bring in new areas where proportionate (notably water), update the sectors to reflect new risks and improve clarity around areas already covered.  

In welcome news, the government has also confirmed that exemptions will be introduced for certain internal reorganisations and insolvency situations. 

The reforms are an important part of the government’s broader growth plan aimed at ensuring that the UK’s regulatory regimes do not disproportionality disincentivise much needed investment in critical sectors.  The government recognises that a key plank of stimulating economic growth and supporting UK jobs is a regime that is business-friendly, pro-innovation and facilitates investment while robustly protecting national security.  The proposed reforms are intended to help achieve that.  

The Proposed Reforms

The two main areas of reform are:

1. The mandatory notification sectors: Today’s announcement starts the first full review of the sectors setting out concrete proposals for change following previous calls for evidence.  Running to 14 October, it is an important opportunity for investors and businesses to comment on both the changes the government has proposed, and any other changes that are needed to improve transparency, predictability and proportionality.  Further details of the proposed changes are set out below. 
2. New exemptions: The government has added more colour to much anticipated plans to ease the burden on businesses by introducing exemptions for certain types of internal reorganisations and appointments of liquidators, special administrators and official receivers.  More details are expected soon.  

Annual Report – enforcement trends

The latest annual report, also published today, highlights the growing number of deals impacted by the regime and underlines the need to ensure it is as transparent and proportionate as possible. 

In the 1 April 2024 – 31 March 2025 reporting period:

• notifications were up 25% on the previous year;
• 56 deals were called-in for in-depth review (including 7 non-notified deals) – up from the previous year (41 call-in notices), but still representing a small proportion (4.5%) of notified deals;
• 17 final orders were made (16 allowing deals to proceed subject to conditions, and one order to unwind) – again, up on 5 final orders in the previous year; and
• the government identified 60 offences of completing a notifiable acquisition without approval.  No penalties were imposed, but companies were required to provide reassurance that steps have been taken to prevent any recurrence. 

While the absolute number of interventions has increased, investors should be encouraged that only a small percentage of deals are still called-in for in-depth review and very few deals are blocked – in most deals that raise potential concerns, there is a way through with remedies. 

Proposed changes to the mandatory notification sectors

The most headline grabbing reform is one trailed by the previous Conservative government and brought into sharper focus by the Independent Water Commission’s recent findings – bringing the water sector into the mandatory notification regime. 

But important changes are also proposed for businesses active across multiple sectors and supply chains – including AI, critical minerals, semiconductors, data centres and energy. 

More detail on the proposed changes

The proposed reforms impact businesses active in – and investors looking to invest in – the following sectors:

1. Water: coming a day after the government published Sir Jon Cunliffe's report calling for Ofwat to be abolished, the government has proposed adding the water sector to the mandatory regime given concerns regarding resilience in the sector.  The proposal will allow the government to scrutinise any changes of ownership of any of the 17 licensed water and/or sewerage companies across England and Wales on national security grounds.  Companies operating solely as a retailer in the non-household retail market for water are excluded from mandatory notification obligations, but transactions involving such companies could still be called-in under government’s existing broad call-in powers. 
2. Artificial Intelligence: following concerns that the scope of the Artificial Intelligence sector was too broad, an updated definition aims to be sufficiently broad to capture emerging national security risks from “powerful and evolving technology”, while excluding the rapidly developing number of businesses using AI for low-risk activities.  Companies using consumer AI as a tool within internal processes (without further material R&D of that technology) will now fall out of scope. The government’s focus is on businesses involved in the development, production, testing or evaluation of AI where there is a meaningful change in the ability of the AI system to “do new things, the same things quicker, or the same things better”. 
3. Critical Minerals: currently covered as part of the broad Advanced Materials sector, Critical Minerals will be a new stand-alone schedule covering businesses active in the research, development, production, exploration, extraction, processing or recycling of critical minerals or enablers.  The proposal seeks to align the critical minerals list with latest UK Criticality Assessment (in which the Critical Minerals Intelligence Centre identifies and evaluates minerals vital to the UK economic and national security), while also retaining strategically important minerals necessary for defence or scientific purposes beyond those identified in the Criticality Assessment.  This change is expected to increase the number of transactions caught by the regime as UK production volumes grow to meet demand for net zero technologies and as advanced manufacturing increases. 
4. Semiconductors: another standalone sector – Semiconductors – will be introduced, with more activities (advanced packaging techniques and activities involving the wider design process of processing units and memory chips) brought in scope.  This new sector will also be merged with the current Computing Hardware sector. The government does not expect this change will increase the number of notifications as most UK businesses active in semiconductors will already be in scope, but a small number of voluntary notifications from the purchase of IP related to advanced packaging are expected. 
5. Data Infrastructure: third-party operated data centres, including data processing and data storage facilities, and businesses offering peering/interconnection or subsea cable connections will be brought in scope.  This includes certain Cloud Service Providers and Managed Service Providers (those offering Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service).  The proposal is intended to reflect the changing national security risks in this area. Based on the number of operators running data storage facilities, these changes are expected to bring up to 50 more businesses in scope and result in up to 10 more notifications per year. 
6. Energy: the proposed changes expand the scope of application to businesses involved in electricity generation with a new 500MW cumulative capacity threshold, which will apply at every increment beyond 500MW.  This replaces the current 1GW threshold for combined capacity of the acquirer and target.  Businesses holding a multi-purpose interconnector licence are also brought into scope. 
7. Advanced Materials: the new definition will include Rare Earth Elements and their use in the production of certain dual-use objects, along with a small number of additional materials (e.g. activated carbon). 
8. Communications: only providers of associated facilities with a turnover of at least £5m will be caught, but the thresholds for cable landing stations, submarine cable systems and repair and maintenance services will be removed as these represent critical segments of the UK telecommunications sector. 
9. Critical Suppliers to Government: the list of public sector authorities will be narrowed to focus on the 24 ministerial departments and provide greater clarity by specifying the level of clearance under the relevant contract with the government. 
10. Suppliers to the Emergency Services: the sector will be expanded to include subcontractors requiring security clearance at Non-Police Personnel Vetting (NPPV) Level 2 or above, which is estimated to result in up to 50 extra businesses being brought in scope and up to 10 extra notifications a year. 
11. Synthetic Biology: despite feedback that the current definition is long and complex, the government has decided not to narrow the scope of the schedule due to its concern that doing so could increase exposure to national security risks in the sector. The proposed changes are limited to simplifying the exemptions for gene therapies and cell therapies in order to reduce over-reporting. 

Next steps

Watch out for further developments over the next few weeks as the government publishes:

• more guidance to increase transparency in the regime; and
• details of the anticipated exemptions. 

If you are interested in more details and/or responding to the consultation, please speak to your usual Freshfields contact.