Grant audit preparation for UK biotech and deeptech startups: practical checklist and processes

Grant Audit Preparation for UK Tech Startups

Winning an Innovate UK grant is a defining moment for any UK biotech or deeptech startup. It validates your technology and provides non-dilutive funding to accelerate your R&D. But after the celebration, a new reality sets in: the administrative overhead of grant compliance. The looming promise of an independent audit can create significant anxiety, especially for founder-led finance teams without a dedicated CFO. Gathering invoices, justifying staff time, and mapping your internal accounts to Innovate UK’s rigid structure feels daunting.

This guide provides a practical, straightforward system for grant audit preparation. It’s designed for early-stage businesses using tools like Xero and spreadsheets, focusing on simple processes that ensure you can prove every pound spent. A robust system will satisfy auditors and keep your team focused on building the future, not drowning in paperwork. If you use QuickBooks, see our QuickBooks audit guide for specific instructions.

The One Principle That Matters: The Audit Trail

If you only remember one thing from this article, let it be the principle of the audit trail, sometimes called the 'golden thread'. An Innovate UK grant audit is not a test to catch you out; it is a verification process. The auditor’s job is to follow a clear, logical path from a cost claimed on your grant report back to the original source documents and, ultimately, to the cash leaving your bank account.

The practical consequence tends to be that a missing link in this chain creates a problem. Imagine the auditor picks a £2,000 cost for lab consumables from your claim. They will first ask to see the supplier invoice for that £2,000. Next, they will ask to see the line on your bank statement where that exact £2,000 was paid. If you can provide this clean, two-step verification for every single cost, you will pass the audit. The entire system of grant compliance is built on this foundation of traceability. This is not a memory test. Your evidence should tell a clear story on its own, without needing extensive verbal explanation. Every system you build should be designed to preserve this thread.

How to Prepare for an Innovate UK Grant Audit: Labour Costs

For most R&D-heavy startups, labour is the single largest expense claimed on a grant. Consequently, it receives the most scrutiny from auditors. The key question you must answer is: “How do I prove my team spent their time on this grant project?” The answer lies in robust timesheets and corresponding payroll records that provide clear, auditable evidence.

Creating Audit-Proof Timesheets

While sophisticated time-tracking software exists, the reality for most deeptech startups is more pragmatic: a well-structured spreadsheet is perfectly acceptable. A 'good enough' timesheet for grants does not need to be complicated, but it must be consistent. Your timesheet template should include these essential columns for each entry:

• Employee Name
• Date
• Project Name (specifically the Innovate UK project)
• Number of Hours Worked on the Project
• A brief, clear description of the tasks performed

The task description is critical. It should be specific enough for an external reviewer to understand the work's relevance to the project. For example, “Synthesised compound XYZ for work package 2,” or “Analysed protein folding simulation data from experiment 5.” Vague entries like “R&D work” or “Project meeting” are insufficient and likely to be challenged. This system must be used by every person whose salary is being claimed against the grant, whether in full or in part. They should complete it regularly, ideally daily or weekly, to ensure accuracy. Waiting until the end of the quarter to fill in three months of timesheets from memory is a common mistake that leads to inaccurate and indefensible claims.

Connecting Timesheets to Payroll Costs

Next, you must connect these logged hours to a specific financial cost. This involves calculating a daily rate for each employee. The formula is generally the employee’s annual gross salary plus employer’s National Insurance and pension contributions, divided by a standard number of working days in a year (typically 220-230, after accounting for annual and public holidays). You must document how you arrived at this number of days.

This daily rate is then multiplied by the number of days spent on the project, as evidenced by the timesheets. To provide complete grant funding documentation, you must have official payroll records from your provider (like Pento or Deel) and employment contracts on file to substantiate the gross salary figures used in your calculations. The auditor will check that the timesheet hours, multiplied by the derived daily rate, match the labour cost you have claimed. The logic must be transparent and the calculations correct.

Mapping Your Spending: From Xero Categories to Innovate UK Rules

One of the most common points of failure in an Innovate UK grant audit is the mismatch between a startup’s internal bookkeeping and the official grant categories. Your Xero chart of accounts is designed for running your business, with categories like ‘Software Subscriptions’ or ‘Lab Supplies’. These are optimised for operational reporting, not grant claims. Innovate UK, however, requires you to report all spending under their specific Innovate UK cost categories: Labour, Overheads, Materials, Capital Equipment, Subcontracting, and Travel & Subsistence.

Mapping your internal bookkeeping to these categories before the audit is a critical grant compliance task. This translation prevents you from claiming ineligible costs or having legitimate expenses clawed back due to miscategorisation. The best approach is to create a mapping table in a spreadsheet at the start of your project. This document serves as your guide for each quarterly claim. For costs that are not 100% dedicated to the project, you must also define and consistently apply an allocation methodology. For example, if a software tool is used 40% for the grant project and 60% for other business activities, you can only claim 40% of its cost. You must document this rationale and apply it consistently.

Here is how common startup expenses typically map to the official categories:

• AWS Hosting Bill: Cloud computing resources used for data analysis are often considered a consumable in deeptech R&D. This expense would generally fall under the Materials category.
• GitHub Enterprise Subscription: A software development platform used entirely by the R&D team for the project also qualifies as Materials. If its use is split, you must prorate the cost based on a reasonable allocation.
• Pipette Tips and Reagents: These are classic examples of consumables for a biotech lab experiment and should be categorised as Materials.
• External Data Science Agency: When you hire an external firm to build a specific machine learning model, this is considered Subcontracting. You must have a clear contract defining the deliverables. This category is not for internal staff.
• Spectrometer Purchase: A piece of lab equipment with a life of more than one year is classified as Capital Equipment. Be aware of depreciation rules, as you often cannot claim the full upfront cost.
• Train Ticket to Manchester: If this was for a project meeting with a university partner, it falls under Travel & Subsistence. All claims must be directly related to the project and adhere to policy limits. See our expense report guide for more on allocation.

Building Your Evidence File: A Simple System for Every Expense

Once you know how to categorise your costs, you need a system for storing the evidence. The key question founders ask is: “What documents do I actually need to keep, and where should I put them?” An auditor needs to see two things for every expense: proof of cost and proof of payment. Relying on searching through your inbox or Xero attachments during the audit is a recipe for stress and potential failure.

What founders find actually works is a simple digital folder system, which we can call the 'Three-Part Folder' rule. For every single cost line in your grant claim, you should have a dedicated folder in a shared drive (like Google Drive or SharePoint) containing three key documents. For more on document retention, consult our audit working papers guide.

1. Proof of Claim: A record of what you claimed. This can be a line from your claim submission report or a simple spreadsheet detailing the expense.
2. Proof of Cost: The supplier invoice, contract, or expense receipt. This document justifies *why* the cost was incurred and its amount.
3. Proof of Payment: The corresponding bank statement, with the specific transaction highlighted. This proves the money actually left your company’s account.

The flow is simple and creates that essential audit trail: The Claim is justified by the Invoice, which is verified by the Bank Statement. Let’s walk through a complete example for a £5,000 subcontractor expense. You hired a specialist consultancy to perform a technical validation study for your project. Your evidence folder, named 'Consultancy ABC - Q3 Claim', would contain:

• Document 1 (Proof of Claim): A PDF export of your Innovate UK claim for Quarter 3, showing a £5,000 line item under the 'Subcontracting' category for 'Consultancy ABC'.
• Document 2 (Proof of Cost): The signed contract or Statement of Work with Consultancy ABC outlining the scope of the validation study. You would also include their final invoice for £5,000, which clearly references the project.
• Document 3 (Proof of Payment): A PDF of your bank statement for the relevant month, with the £5,000 payment to 'Consultancy ABC' clearly highlighted.

This simple, repeatable process for every expense, from a £50 train ticket to a £50,000 piece of equipment, is the backbone of successful grant audit preparation. Consistency trumps complexity every time.

Practical Takeaways: Your Final Grant Audit Checklist

Surviving an Innovate UK grant audit doesn't require an enterprise-grade accounting system or a full-time finance team. Use our startup audit checklist for general statutory readiness. For grant inspections, success requires discipline and a simple, consistent process built from day one. For a founder handling the finance function, focusing on a few core principles is the key to successful grant management.

First, make the audit trail your guiding principle. For every cost, ensure you can link the claim submission back to an invoice and then to a bank payment. If you cannot make this link, you cannot defend the cost.

Second, implement a 'good enough' timesheet system immediately. A simple, shared spreadsheet that captures names, dates, hours, and specific task descriptions is sufficient, but it must be used consistently by everyone whose time is claimed against the project.

Third, actively map your Xero expense categories to the six official Innovate UK cost categories. This proactive translation is fundamental to R&D grant documentation and prevents difficult re-work and potential clawbacks later.

Finally, use the 'Three-Part Folder' system for evidence. For every single expense, collate the claim, the invoice, and the bank statement in a single, clearly labelled folder. This simple organisational habit is the most effective way to build audit-ready financial records. By embedding these pragmatic steps into your startup’s operations, you transform grant compliance from a source of anxiety into a manageable, routine process. Visit the Audit Preparation hub for broader guidance.

Frequently Asked Questions

Q: What is the most common reason for failing an Innovate UK grant audit?
A: The most frequent issues are inadequate timesheets and a broken audit trail. Auditors often find that labour cost claims cannot be substantiated because task descriptions are too vague or timesheets are completed from memory long after the work was done. A missing invoice or bank statement can render a legitimate cost ineligible.

Q: How should we account for overhead costs in our claim?
A: Innovate UK generally allows startups to claim overheads as a fixed percentage of their labour costs, typically 20%. This is specified in your grant offer letter. This approach simplifies the process, as you do not need to calculate and justify individual overhead expenses like rent or utilities.

Q: What happens if an auditor finds an ineligible expense?
A: If an expense is deemed ineligible, the grant funding for that specific amount will be disallowed. This means the cost is "clawed back" by Innovate UK, and your company will have to repay that portion of the grant. This is why accurate categorisation and robust documentation are so important.

Q: Do we need special accounting software for grant compliance?
A: No, special software is not required. Standard tools like Xero or QuickBooks, paired with organised spreadsheets and a disciplined digital filing system (like Google Drive or SharePoint), are perfectly sufficient for providing the necessary grant funding documentation. The key is the process, not the platform.