The UK Government has published its response to the July 2025 consultation on proposed reforms to the National Security and Investment Act 2021. We summarise the key takeaways below.

Background to the consultation response

The UK Government has published its consultation response in relation to reforms to the UK National Security and Investment Act 2021 and the scope of the 17 sectors to which it explicitly applies. It sets out how the Government proposes to proceed.

The Act is the UK's main instrument for screening foreign direct investment, and includes a notification regime for investments within its ambit.

Our previous briefing, here, explained the proposed reforms, which included proposed exemptions from notification under the Act for certain internal reorganisations, and also changes to the definitions of several of the 17 sectors, – including refinements of existing definitions, such as in relation to the Artificial Intelligence sector, as well as the addition of "new" mandatory notification sectors for large water companies and certain categories of "Advanced Materials".

Key takeaways

The consultation response says that the purpose of the reforms is to reduce unnecessary notification requirements whilst strengthening controls in areas of heightened UK national security concern, largely in line with the original proposals contained in the July 2025 consultation. The substance of the consultation response is broadly consistent with this, but it falls short in places.

• Artificial Intelligence. The definition of the AI sector will be refined to exclude commercially available, off-the-shelf AI systems used internally for standard business processes and efficiency, as well as licensed third-party AI systems. Only entities that create or modify AI systems themselves (unless as part of routine business deployment activities and IT policies) will be in scope of the definition, meaning that most end-users of third-party AI solutions will be excluded.  This is a significant improvement on both the existing definition and the initially proposed definition on which the Government had consulted.
• Water. A new mandatory notification sector will be introduced, in order to capture acquisitions of major UK water utilities, including the 17 regional water and sewage undertakers in England and Wales, as well as larger independent providers. This change will bring the UK's regime into line with other existing foreign direct investment regimes that already include water within the scope of "critical infrastructure", noting that water is increasingly considered a critical sector in many jurisdictions.
  
  In addition, mergers involving water companies will remain subject to a special regime for water mergers, to be assessed as regards their implications for effective utility regulation as well as for any competition concerns.
• Semiconductors and critical minerals. Standalone mandatory sectors will be created for Semiconductors and Critical Minerals, which will no longer be grouped within "Advanced Materials". Although the Government has indicated that it will seek to ensure the Critical Minerals sector does not bring within scope low-risk activities, the consultation response confirms that the schedule for Semiconductors will remain intentionally broad, reflecting their dual-use nature and foundational role in critical technologies. 
• Other changes. Minor changes will be introduced to the "Critical Suppliers to Government" category, identifying a specific list of ministerial departments and public sector bodies that will be in scope, and a turnover threshold will be introduced for providers of associated facilities within the Communications sector. There will be no changes to the Defence category, which is intentionally broad, although guidance will be introduced in order to aid understanding regarding subcontracting arrangements.
• Internal reorganisations and appointment of liquidators, special administrators, and official receivers.  The Government has previously stated that it intends to introduce exemptions for these, but the consultation response is silent on this point.  This omission may well be viewed unfavourably by stakeholders seeking a more investment friendly regime. However, the Government has informed us that it still intends to pursue these reforms and expects to say more about that in the coming months.

The Government has indicated that the current sector definitions will remain in force until new secondary legislation is laid before Parliament, expected to take place later this year. In addition, updated and more detailed guidance is expected to be issued alongside the secondary legislation.