Paul Grecian, former managing director of the Reading-based arms company Ordtec, may receive more than pounds 500,000, his solicitor, Lawrence Kormornick, said last night.
Michael Howard has agreed the payment under part of the Criminal Justice Act 1988 which deals with miscarriages of justice. Mr Kormornick will now prepare a "schedule of loss".
The pay-out may be bigger than in some other cases as Mr Grecian, 41, was a successful businessman but has been unemployed since his company went into liquidation as a result of the court proceedings.
Mr Grecian received a suspended sentence in 1992 for illegally exporting artillery fuse to Iraq, but the conviction was quashed when it emerged that documents showing that he had worked for MI5 and MI6 had been withheld from his defence counsel.
Mr Kormornick said: "They have agreed to pay in principle but they haven't agreed a specific sum. I'm absolutely thrilled for [Mr Grecian]. He's had a terrible time and this is the first positive step in the five years since the whole thing blew up."
Mr Grecian has, in addition, been granted a legal aid certificate to pursue a claim against Customs and Excise for malicious prosecution, false imprisonment and wrongful arrest.
The Ordtec affair was investigated as part of Sir Richard Scott's inquiry into arms to Iraq.