Horizon Europe grant accounting for UK biotech and deeptech startups: practical checklist

EU Horizon Grant Accounting for UK Companies

The uncertainty is over. For UK-based deeptech and biotech startups, the door to Horizon Europe, the EU’s flagship research and innovation programme, is officially open again. This access to non-dilutive funding is a significant opportunity, but it comes with a non-negotiable condition: a financial management and reporting framework that is fundamentally different from what UK startups are used to. Managing EU grant accounting after Brexit is not just an administrative task; it is a core operational discipline required to secure, keep, and successfully report on your funding. For a lean startup, getting this right from day one is essential for both compliance and managing your runway. See the Government Grants & Contract Accounting hub for more on project-based accounting.

Foundational Understanding: Can UK Companies Still Get Horizon Europe Grants?

Yes, absolutely. The period of ambiguity that followed Brexit has been resolved. The most important fact to understand is that, as of late 2023, the UK is formally an ‘Associated Country’ to Horizon Europe. This status effectively places UK-based entities on the same footing as their counterparts in EU Member States, granting them full eligibility to participate in and lead project consortiums.

This formal association simplifies the landscape significantly. During the transition, many founders became familiar with a temporary safety net known as the UKRI Guarantee. The UKRI Guarantee was established by the UK government to fund successful UK applicants for calls during the transition period before formal association was confirmed. While crucial at the time, this is now largely a feature of the past. Today, UK companies apply for and receive funding directly from the EU under the standard Horizon Europe rules, making a clear understanding of post-Brexit research funding rules more critical than ever.

Securing Your Place: Consortium and Eligibility Nuances for UK Companies

Before diving into the accounting specifics, it is vital to understand the structural requirements of a successful application. EU grants, particularly within Horizon Europe, are designed to foster cross-border collaboration. This means you will typically not be applying in isolation.

For a standard collaborative project, a consortium needs at least three independent legal entities from three different EU Member States or Associated Countries. As the UK is now an Associated Country, a UK-based startup can count as one of these three. For example, a UK biotech firm could form a consortium with a German university and a French research institute to meet the baseline requirement. You can find practical guidance on managing multi-partner projects in our Multi-Partner Grant Accounting: Consortium Projects guide.

Within this structure, it is important to distinguish between the roles of Coordinator and Partner. The Coordinator is the lead organisation, responsible for submitting the proposal, managing the project, and handling the primary financial reporting to the EU. This role carries a significant administrative burden, including consolidating reports from all partners and distributing funds.

As a Partner, your reporting obligations are to the coordinator, who then consolidates everything for the EU. For an early-stage startup, joining a consortium as a partner is often a more manageable first step into the world of EU funding. This approach allows you to learn the ropes of Horizon Europe financial reporting with a lower administrative load and reduced risk.

Building Your Audit-Ready Engine: How to Manage EU Grant Accounting After Brexit

This is where the operational reality of EU grant compliance for UK startups truly begins. The EU funds ‘actual, eligible costs’ incurred for the project, requiring a clear audit trail. This principle is central to EU grant accounting and differs starkly from other funding sources. Your VC investors want to see progress and growth metrics; the EU wants to see meticulous, auditable proof of every pound spent on the project.

The reality for most Pre-Seed to Series B startups is more pragmatic: you do not need an enterprise-grade ERP system, but you do need to configure your existing tools, like Xero, with discipline. You must shift your mindset from high-level P&L management to project-level cost justification. Your accounting system must be able to isolate and report on three core cost pillars:

1. Personnel Costs: This is often the largest and most scrutinised category. You must be able to justify the time your team spends on the project. This requires diligent timesheets from everyone, from scientists in the lab to the CEO, for the hours they dedicate specifically to the Horizon project. Tools like Harvest or Toggl are sufficient, but the data must be consistent, signed off by a manager, and reconcilable with your payroll records in Xero.
2. Direct Costs: These are costs directly attributable to the project, including consumables, project-specific equipment, and travel for project meetings. The distinction between eligible and ineligible costs is critical. For a UK biotech startup developing a new therapeutic platform, an eligible direct cost would be the purchase of a project-specific spectrometer. An ineligible cost would be the legal fees for your general company fundraising activities, as this does not directly advance the EU project's objectives.
3. Indirect Costs (Overheads): This category covers general operational costs like rent, utilities, and administrative support that are not directly tied to the project but are necessary for the business to function. Rather than demanding a complex calculation of your actual overhead allocation, the EU offers a vital simplification. Indirect costs can be claimed as a flat rate of 25% of eligible direct costs, excluding subcontracting costs. For a startup with a limited finance team, this flat rate is a gift. It removes a huge administrative burden and provides a clear, defensible method for claiming overheads without an exhaustive audit of your utility bills.

To implement this in Xero, your first step is operational. Create a Tracking Category named “Horizon Project” and set up a category option with your specific project name. This allows you to tag every single transaction, from supplier bills to payroll journals, that relates to the grant. This simple configuration turns Xero into a powerful tool for EU grant compliance. For practical Xero workarounds and reporting, see Grant Tracking Workarounds in Xero.

Bridging the Gap: Managing Cash Flow on an EU Reimbursement Schedule

Successfully tracking costs is only half the battle. The greatest challenge in how to manage EU grant accounting after Brexit often lies in managing your company’s cash flow. The EU funding model is retrospective and reimbursement-based, a world away from the upfront tranches of capital provided by VCs.

Understanding the payment schedule is key to survival. The EU payment cadence consists of: 1) Pre-financing, 2) Interim Payments (typically every 12-18 months), and 3) a Final Payment. For more on revenue timing for upfront vs retrospective payments, see our guide on Advance Payment Grants: Revenue Recognition Timing.

• Pre-financing: Upon signing the grant agreement, you receive an initial payment. This is not the full grant amount but a portion designed to get the project started. It provides an initial buffer, but you will spend it quickly.
• Interim Payments: After each reporting period, you submit a detailed financial report of your actual, eligible costs. The EU reviews this report and then reimburses you for the approved expenses. This creates a significant lag between you spending the money and the EU paying you back.
• Final Payment: At the project's conclusion, you submit the final report. The EU releases the remaining funds after approval.

To complicate matters further, a percentage of the grant total is held back in a 'Guarantee Fund' until after the final project report is approved. This acts as a form of insurance for the EU and means you will not receive 100% of your funds until well after the project work is complete.

This reimbursement model creates a direct and pressing cash flow problem for high-burn deeptech and biotech startups. You must have sufficient runway from your equity funding to cover all project costs for up to 18 months before seeing the next cash injection from the grant. It's a crucial mindset shift. Founders must model their cash flow with these reimbursement gaps explicitly factored in. We see that the most successful companies treat the EU grant as a future receivable, not as cash in the bank, and maintain a separate bank account for grant funds to avoid co-mingling with operational capital.

Practical Playbook: Your First 90 Days After Grant Approval

Once the celebration of your grant approval is over, disciplined action is required immediately. Here is a simple playbook for setting up your financial operations for success and ensuring strong Horizon Europe financial reporting from day one.

Days 1-30: Foundational Setup

Your first move is to ring-fence the grant's finances. Open a new, dedicated bank account solely for receiving and disbursing grant-related funds. In Xero, create a new Tracking Category titled “EU Project” and add your specific project name (e.g., “Project Immuno-X”) as a category option. This is your primary tool for isolating grant costs. Simultaneously, configure your timesheet software with the same project name and train every team member on the absolute necessity of logging their project-specific hours accurately. For a formal policy framework, consult the Grant Accounting Policy Template for Startups.

Days 31-60: Process Integration and First Test

As you begin incurring costs, rigorously apply your new system. Every relevant invoice, expense claim, and payroll run must be tagged with the “Project Immuno-X” tracking category in Xero. At the end of the first full month, run your first project-specific financial review. Check that all team members submitted complete timesheets and that expenses are being categorised correctly. This is your first test run for the official EU report; treat it with the same level of detail. For a repeatable process, see our Month-End Grant Reconciliation Process.

Days 61-90: Review, Refine, and Report

With two months of data, generate a Profit and Loss report in Xero, filtered by your project tracking category. This report is the prototype for your formal EU submission. Does it accurately reflect project activity? Are there any untagged expenses that should have been included? Use this period to refine your internal processes and ensure your data is clean and complete. This report now becomes your single source of truth for managing the project budget and forecasting future costs, ensuring you are audit-ready from the very beginning.

Conclusion

Securing a Horizon Europe grant is a powerful validation of your technology and a fantastic source of non-dilutive capital. However, this opportunity demands a new level of financial discipline. For UK biotech and deeptech startups, success hinges on moving beyond standard startup accounting and embracing a more rigorous, project-centric approach.

By understanding the consortium rules, meticulously tracking actual costs using tools you already have like Xero, and proactively managing your cash flow to accommodate the EU’s reimbursement schedule, you can de-risk the process entirely. The key is to implement these robust systems from the moment the grant is approved. Doing so ensures that your financial operations support your scientific innovation, allowing you to focus on what you do best: building the future. Continue at the Government Grants & Contract Accounting hub.

Frequently Asked Questions

Q: What is the biggest accounting mistake UK startups make with Horizon Europe grants?
A: The most common errors are underestimating the cash flow gap caused by the reimbursement model and inconsistent time tracking. Failing to accurately record all project-related personnel hours is the quickest way to have costs disallowed during an audit, directly impacting the funding you receive.

Q: Can I use my main business bank account for a Horizon Europe grant?
A: While technically possible, it is strongly discouraged. A dedicated bank account for grant funds is an audit best practice. It prevents co-mingling of funds, simplifies reconciliation, and provides a clean financial trail for EU reporting, significantly reducing audit risk and administrative burden.

Q: How are currency fluctuations between the Euro (EUR) and Pound Sterling (GBP) handled?
A: Your grant is awarded in EUR, but you incur costs in GBP. You must report your costs in EUR according to the exchange rate rules defined in your Grant Agreement, which often specifies using the European Central Bank (ECB) rate for the reporting period. This creates a currency risk that you must monitor and manage.

Q: Do I need to hire a specialist grant accountant for EU grant compliance?
A: For a single, straightforward project, a dedicated internal finance person can manage compliance by setting up disciplined processes from the start. However, if you are coordinating a large consortium or managing multiple grants, the complexity increases significantly, and a specialist's expertise can be a valuable investment.