Practical Innovate UK Grant Accounting Guide for UK Biotech and Deeptech Startups

How to Manage Innovate UK Grant Finances: A Practical Setup Guide

Securing an Innovate UK grant is a defining moment for any Deeptech or Biotech startup. It validates your technology and provides essential, non-dilutive capital. After the celebration, a new reality sets in: the meticulous process of managing the funds. For founders without a dedicated finance team, the prospect of grant accounting, claims, and audits can seem daunting. The core challenges are proving which project costs are eligible, configuring systems to track them accurately, and navigating the cash flow implications of a reimbursement-based model.

This guide provides a practical framework for how to manage Innovate UK grant finances effectively. We will walk through setting up your systems correctly from day one, understanding the rules on eligible costs, managing the claims process, and preparing for the final report. Following these steps will help you meet all Innovate UK compliance requirements without distracting from your core mission: innovation.

Part 1: Your First 30 Days and the Golden Rule of Grant Accounting

The first month of your project is the most critical period for establishing a compliant financial framework. With the grant secured, the very first action in your finance and time-tracking systems is to implement the Golden Rule. The golden rule is simple: you must be able to completely isolate all grant-related income and expenditure from your company’s other operational or research activities.

In practice, this means creating a unique project identifier within your accounting software. For UK startups using Xero, this is best achieved by setting up a Tracking Category dedicated to the grant. From this point forward, every single transaction related to the project, from a scientist’s salary allocation to a laboratory consumable purchase, must be tagged with this code. You can find more information on Xero’s project features in their guide to Projects & Time tracking.

Simultaneously, you must establish a system for compliant time tracking. While spreadsheets are technically acceptable, dedicated tools like Toggl or Harvest make the process simpler and less prone to error. Every team member working on the project must log their time, ideally daily. Each timesheet entry needs five key pieces of information:

• Date
• Employee Name
• Hours Worked
• The specific Project Code (e.g., “IUK-Project-12345”)
• A brief, clear description of the activity performed (e.g., "Synthesising compound XYZ for work package 2").

This discipline is non-negotiable. It provides the essential evidence for your largest claimable cost: labour.

Part 2: Innovate UK Eligible Costs and How to Evidence Them

Successful grant management depends on understanding what costs qualify for reimbursement and what specific evidence Innovate UK expects to see. The key is documentation; you must be able to produce a clear audit trail for every pound claimed, connecting a project activity to an expense and then to a confirmed payment. According to the official guidance, Innovate UK eligible costs primarily fall into four categories.

A. Labour Costs

This is typically the largest component of your grant claim. Costs are not based on freelance rates or notional values but on a defined formula for the employee's daily rate. This calculation reflects the actual cost to the business for an employee's time.

The formula is: (Annual Gross Salary + Employer National Insurance + Employer Pension Contributions) / Number of Contractual Working Days per Year.

The number of contractual working days is generally around 230, after accounting for weekends, bank holidays, and annual leave. For example, consider a biotech startup with a research scientist earning a £60,000 gross annual salary. The employer’s NI contribution is £7,150, and the employer pension contribution is £2,500, making the total employment cost £69,650. Using 230 working days, the daily rate is £69,650 / 230 = £302.83. If this scientist spent 10 days on the grant project in a given month, you would claim £3,028.30.

Evidence Required:

• Compliant timesheets showing days worked on the project, signed by the employee and a manager.
• Payroll records or payslips confirming the gross salary used in the calculation.
• HMRC records showing payment of Employer NI contributions.
• Pension statements showing payment of employer contributions.
• Employment contracts specifying contractual working days.

B. Overheads

Innovate UK provides two options for claiming overheads, which cover the indirect costs of running your business. You can either meticulously calculate and evidence actual overheads apportioned to the project (such as rent, utilities, and IT support), or you can use a simplified, flat-rate method. The reality for most pre-revenue startups is that the time and effort spent calculating and evidencing actuals is better spent on research and development.

For this reason, most early-stage businesses choose the second option. As a stated rule, "Overheads can be claimed as a flat rate of 20% of labour costs, which does not require additional evidence." This is a simple, audit-proof way to cover indirect costs without generating a mountain of administrative work. You simply calculate 20% of your total claimed labour costs for the period and add it to your claim.

C. Materials

This category includes all consumables and materials directly used and fully consumed by the project. For a deeptech firm, this might be specialist electronic components or sensor modules. For a biotech company, it could be reagents, cell cultures, or laboratory plastics. It is important to distinguish this from capital equipment purchases, which are treated differently and often require specific justification and approval.

Evidence Required:

• Itemised supplier invoices addressed to your company, not an individual.
• Purchase orders that clearly reference the grant project code.
• Bank statements showing the corresponding payment leaving the company account. Every invoice must be matched with proof of payment.

D. Subcontractors and Consultants

You can claim costs for external specialists performing specific, defined tasks that are essential to the project and cannot be performed by your internal team. It is crucial to distinguish between eligible, project-specific work and ineligible generic business services. For example, a third-party laboratory running a specialised assay is an eligible cost. General business coaching or fundraising support is not.

The work must be directly related to the project’s technical objectives and outlined in your original application. Any significant subcontracting not initially budgeted for may require approval from your monitoring officer.

Evidence Required:

• A formal contract or Scope of Work (SoW) detailing the specific tasks, deliverables, timeline, and costs.
• Invoices from the subcontractor that clearly reference the project and the SoW.
• Bank statements showing proof of payment for those invoices.

Part 3: The Innovate UK Grant Claims Process and Cash Flow Management

Understanding the reimbursement cycle is vital for managing your startup's runway. Innovate UK funding is not provided as upfront working capital. Instead, "Reimbursement is handled via a quarterly claims process, paid in arrears for costs already incurred." This means you must fund 100% of the project costs for a three-month period yourself before submitting a claim to be reimbursed for the grant’s portion.

After compiling all your evidence for the quarter, you submit your claim through Innovate UK’s online portal. The claim is then reviewed by a monitoring officer. The "Typical turnaround time from claim submission to cash receipt is 30-60 days, but can be longer if queries are raised." This creates a significant cash flow gap. You could be waiting up to five months from the day you incur a cost to the day you receive the grant funding for it.

A scenario we repeatedly see is founders treating grant approvals like cash in the bank. In reality, it is a receivable you have to fund for up to 150 days. Your operational runway must account for this lag.

Effective grant reporting for startups requires building this delay directly into your financial forecasts. You must ensure you have sufficient operational capital to bridge this gap. Any queries or missing information on your claim can extend the payment timeline, making meticulous financial documentation your best defence against cash flow disruption.

Part 4: Preparing for the Innovate UK Audit (The IAR)

As your project progresses and your claims accumulate, you will encounter the grant audit, officially known as the Independent Accountant's Report (IAR). An IAR is a third-party verification of your grant claims. It is important to distinguish this from a full statutory audit of your company’s entire financial statements. The IAR is narrowly focused on checking that your claimed project costs are eligible, correctly calculated, and supported by the required evidence. For details on the broader accounting treatment, see IAS 20 on government grants.

This report is not required for every project from the beginning. As a rule, "An Independent Accountant's Report (IAR) is typically required for projects once claims cross a certain threshold, such as £150,000." When you reach this cumulative claim value, Innovate UK will instruct you to engage an independent accountancy firm to produce the report.

Preparation for the IAR begins on day one. If you have followed the framework in this guide, the process should be straightforward. Your appointed accountant will review the systems you established, sample transactions from your claims, and trace them back to the source documents: timesheets, payroll records, supplier invoices, and bank statements. The robust, organised financial documentation you have maintained is the key to a smooth IAR process, making it a simple validation exercise rather than a stressful forensic investigation.

Practical Takeaways for Managing Your Grant

Successfully managing Innovate UK grant finances hinges on discipline and foresight. It does not require complex enterprise software but demands a commitment to robust processes from the very beginning. For a structured approach, consider using a resource like our Grant Accounting Policy Template for Startups.

1. Implement the Golden Rule Without Fail. Isolate every grant-related transaction using a project code in your accounting software from day one. This is the single most important step for simplifying all future grant reporting and audit preparation.
2. Be Pragmatic with Overheads. Claim overheads using the 20% flat rate of labour costs. This massively reduces your administrative burden and is a fully compliant, accepted method that avoids complex apportionment calculations.
3. Document Everything Meticulously. Your claim is only as strong as the evidence supporting it. Maintain organised digital folders for every cost category, ensuring every invoice has a corresponding proof of payment and every hour of labour is captured on a compliant timesheet.
4. Manage Cash Flow Proactively. Remember that grant funding is paid in arrears. Model the 90 to 150-day lag between spending cash and receiving reimbursement into your financial forecasts to protect your company’s runway.

By embedding these practices into your operations, you can ensure financial compliance, streamline your claims process, and keep your focus where it belongs: on delivering the groundbreaking innovation your grant was awarded to support. To learn more, continue at the Government Grants & Contract Accounting hub.

Frequently Asked Questions

Q: Can directors or founders claim their salary as a labour cost?
A: Yes, provided they are on the company's payroll (PAYE) and have a formal employment contract. Their salary costs are calculated using the same daily rate formula as any other employee. You must maintain compliant timesheets to evidence the time they spend directly on the project's technical work.

Q: What is the difference between materials and capital equipment?
A: Materials are consumables fully used up during the project (e.g., reagents, electronic components). Capital equipment refers to durable assets that are not consumed (e.g., a microscope, a specialised server). Equipment purchases have stricter rules, often requiring prior approval, and are depreciated over their useful life rather than claimed as a single expense.

Q: What happens if our actual project costs are lower than the grant budget?
A: Innovate UK grants are paid based on your actual, eligible costs, not the budget. If you underspend, you will simply claim and receive less funding. The grant reimburses a percentage of your actual expenditure up to the maximum approved budget. You are not penalised for an underspend, but you cannot claim funds for costs you did not incur.