SME and VCSE spend targets: what PPN 001 requires of government departments

The key facts

• PPN 001, issued in February 2025, requires all central government departments, executive agencies and non-departmental public bodies to set procurement spend targets for SMEs and VCSEs.
• Departments must set a three year target for direct spend with SMEs from 1 April 2025, and a two year target for direct spend with VCSEs from 1 April 2026, both to be achieved in the financial year ending March 2028.
• SME targets must be signed off by the department's relevant Minister, who was to confirm the target in writing to the Parliamentary Secretary at the Cabinet Office by 31 May 2025.
• Results must be published annually, no later than 30 September, for the previous financial year.
• Executive agency and NDPB spend counts within the parent department's target, but bodies with procurement spend over £100 million a year have their SME and VCSE spend published separately.
• SMEs are defined under section 123 of the Procurement Act 2023: fewer than 250 staff, and turnover of £44 million or less or a balance sheet total of £38 million or less.
• VCSEs are defined under the Procurement Regulations 2024 as non-governmental organisations that are value-driven and principally reinvest surpluses to further social, environmental or cultural objectives.
• The PPN does not apply to NHS trusts and foundation trusts, or to contracting authorities whose functions are devolved or mainly devolved.

What PPN 001 is and who it applies to

Procurement Policy Note 001, issued in February 2025, turns a strategic ambition into a measurable obligation. The National Procurement Policy Statement, the statutory statement of the government's priorities for public procurement launched on 13 February, includes driving economic growth and strengthening supply chains by giving small and medium-sized enterprises and voluntary, community and social enterprises a fair chance at public contracts. PPN 001 is the implementation mechanism: departments must set spend targets and report against them.

The PPN applies to all central government departments, their executive agencies and non-departmental public bodies, described as in-scope organisations. It does not apply to NHS trusts and foundation trusts, nor to contracting authorities whose functions are devolved or mainly devolved to Scotland, Wales or Northern Ireland, though other contracting authorities may choose to adopt the approach. The note asks for circulation beyond commercial teams, to data, finance, operational and sustainability roles, a hint that the hard work here is as much about spend data as about procurement practice.

The targets and the deadlines

Two targets are required. First, a three year target for direct spend with SMEs, running from 1 April 2025. Second, a two year target for direct spend with VCSEs, running from 1 April 2026, with departments expected to work towards setting it during 2025/26 so it is in place by the deadline. Both targets are to be achieved in the financial year ending March 2028. Organisations may also set voluntary targets for indirect spend, through the supply chain, in addition to direct spend if they wish.

Accountability is personal and public. Each department's SME target had to be signed off by its relevant Minister, who was to write to the Parliamentary Secretary at the Cabinet Office confirming the target by 31 May 2025. Results for both SME and VCSE spend must then be published annually, no later than 30 September, covering the previous financial year.

Executive agencies and NDPBs are included within their parent department's target rather than setting their own. There is one transparency exception: where an agency or NDPB has procurement spend over £100 million a year, its annual direct spend with SMEs and with VCSEs must be published separately by the parent department.

The definitions that decide who counts

Targets are only as meaningful as the definitions beneath them. For SMEs, the PPN points to section 123 of the Procurement Act 2023: a supplier with fewer than 250 staff, and either turnover of £44 million or less or a balance sheet total of £38 million or less. The Cabinet Office has also published supplementary guidance on ownership considerations, for instance where a large enterprise creates a new, small subsidiary that might otherwise masquerade as an SME.

For VCSEs, the definition comes from the Procurement Regulations 2024: a non-governmental organisation that is value-driven and which principally reinvests its surpluses to further social, environmental or cultural objectives. Classifying suppliers correctly against these definitions, and keeping that classification current in spend systems, is the unglamorous foundation of the whole regime. A department that cannot reliably tag SME and VCSE suppliers in its spend data cannot set a credible target, let alone report against one.

The wider Procurement Act reforms behind the targets

The PPN sits on top of reforms in the Procurement Act 2023 designed to make public supply chains easier for small businesses to enter. It highlights four: a new duty on contracting authorities to have regard to SME participation and consider whether barriers to entry can be removed; greater visibility of upcoming opportunities and early market engagement so SMEs can prepare to bid; a bar on requiring insurance relating to contract performance to be in place before award; and 30-day payment terms applying throughout the public sector supply chain.

Read together, the message is that the targets are not meant to be hit by relabelling existing spend. They are meant to be hit by changing behaviour: publishing pipelines earlier, engaging markets before tenders land, removing disproportionate requirements, and paying promptly enough that small firms can afford to take public work. The Plan for Small Business commitments the PPN references point the same way.

How eSourcing Data helps

Hitting a spend target starts with seeing spend clearly. eSourcing Data holds supplier records that can carry SME and VCSE classifications against the statutory definitions, so reporting on direct spend by supplier type becomes a query, not an annual archaeology project. That supports both the internal target-setting conversation and the published annual figures due each September.

The behavioural levers matter just as much. Publishing notices and pipeline information through the platform gives smaller suppliers the early visibility the Procurement Act reforms intend, and structured pre-market engagement helps explain requirements to firms that lack bid teams. Below-threshold workflows are particularly relevant: much SME and VCSE-friendly spend sits under the main thresholds, and running it through a consistent, recorded process makes it both fairer and countable.

Finally, the audit trail evidences the new duty to have regard to SME participation: each procurement's record shows what was considered and what barriers were removed, which is precisely the kind of evidence departments will want behind their published numbers.

What to do about it

1. 1Confirm your organisation's SME target is set, ministerially signed off and communicated, with the VCSE target in place by 1 April 2026.
2. 2Audit supplier records against the section 123 SME definition and the VCSE definition, and fix classification gaps in spend data.
3. 3Establish the annual reporting pipeline now so publication by 30 September each year is routine, not a scramble.
4. 4Check whether any executive agency or NDPB in your group exceeds £100 million procurement spend and needs separately published figures.
5. 5Publish forward pipelines and run early market engagement so SMEs and VCSEs can see and prepare for opportunities.
6. 6Review standard procurement requirements, including insurance timing and payment terms, against the Procurement Act reforms the PPN highlights.
7. 7Consider a voluntary indirect spend target to extend visibility into the supply chain.