If your organisation has received Innovate UK funding, you’ll need an independent audit of your grant spending at some point during the project. UK Research and Innovation (UKRI) requires every grant recipient to submit an independent accountant’s report (IAR) confirming that claimed costs are properly supported and match the grant terms. It’s not optional. Getting it wrong can mean repaying funds or losing eligibility for future Innovate UK grants.
This guide covers what the audit involves, which costs qualify, common pitfalls, and how to pick the right specialist.
What is an Innovate UK grant audit?
An Innovate UK grant audit is an independent review of your project expenditure by a registered auditor or chartered accountant. They check that costs you’ve claimed are genuine, correctly calculated, and allowed under your specific grant agreement.
UKRI calls it an “IAR” rather than a statutory audit. But the work is similar: the specialist examines your financial records, tests a sample of transactions, and issues a report that Innovate UK relies on when deciding whether to release funding. In practice, most people call it a grant audit.
You’ll typically need the IAR at project end alongside your final claim. Larger grants – generally those above 500k or running longer than 18 months – often require interim reports too. The size of the grant and the conditions of the grant award letter determine exactly when a report is required.
Which Innovate UK grants need an audit?
Most Innovate UK grant funding programmes require an IAR, including Smart Grants, sector-specific competitions, and collaborative R&D awards. The requirement usually kicks in once total grant funding exceeds a set threshold or at the final claim stage.
Your grant award letter will state whether an independent accountant’s report is needed and at which milestones. If you’re unsure, check with your monitoring officer at Innovate UK – don’t assume you’re exempt.
What costs are eligible?
Innovate UK is strict about eligible expenditure. The main categories are:
- Labour costs. Salaries and wages for staff working directly on the project. You’ll need timesheets showing hours spent, and the labour cost calculation must follow the day rate formula – typically annual salary divided by 220 productive days. Employer’s NI and pension contributions count. PAYE scheme records and payroll records must support every claim.
- Overheads. Usually claimed as a percentage of staff costs (20% is common for academic partners, though the overhead rate varies by scheme). The rate is set in your grant agreement – you can’t change it later.
- Materials and consumables. Items bought specifically for the project. Capital equipment usually isn’t eligible for inclusion unless you’re claiming depreciation over the project period.
- Subcontractors. Work outsourced to third parties at arm’s length, with proper procurement records and purchase invoices. The auditor will check these were genuine arm’s length transactions.
- Travel and subsistence. Project-related travel at reasonable rates. First-class travel and entertainment won’t pass.
VAT is only claimable if your organisation can’t recover it through HMRC. Most VAT-registered businesses must exclude VAT from their grant claim entirely.
The audit process
A typical Innovate UK audit follows a clear pattern. The accountant will request your project costs spreadsheet, general ledger extracts, a statement of expenditure, and supporting documents for a sample of transactions. For labour, that means employment contracts, payslips, timesheets, and the day rate workings. For other costs incurred, it means invoices, purchase orders, and proof of payment.
They then check each sampled item against the eligibility criteria in your specific grant agreement. Common issues include:
- Timesheets that aren’t signed or don’t match the hours claimed for time on the project
- Day rate calculations using the wrong denominator (220 days is standard, but some organisations use different figures)
- Overhead percentages that don’t match the grant agreement
- Missing invoices for subcontractor work
- Costs claimed before the official start date or after the end date
- Staff costs allocated across multiple projects without a clear, documented method
Once the review is complete, the auditor issues the IAR. If there are problems, you’ll usually get a chance to provide additional evidence or adjust the claim before submission to UKRI. A good audit specialist will flag issues early so you can fix them, not just report what’s wrong.
How to prepare for an Innovate UK audit
Good preparation makes the audit process faster and cheaper. Start keeping clean records from day one of the project – don’t leave it until the first claim or the final claim deadline.
Set up separate cost codes in your accounting system so you can pull Innovate UK spending quickly. Keep timesheets up to date monthly, not retrospectively at project end. Build a working file that maps every claimed item to its supporting evidence so the accountant can trace any line to a document within minutes.
If staff split time across multiple projects, document the allocation method and apply it consistently. UKRI reviewers are particularly careful about labour cost apportionment because it’s the area most prone to error. And keep payroll records accessible – the auditor will need to tie claimed salary costs back to actual PAYE records.
For SMEs running their first grant-funded R&D project, the record-keeping requirements can feel heavy. But they’re the same standards any grant funding body expects, and building good habits from the start avoids a scramble later.
What happens if the audit finds problems?
Minor issues are common and usually fixable. Missing a signature on a timesheet or using a slightly different overhead rate calculation can often be resolved by providing additional evidence or making a small adjustment to the claim.
Serious problems – like costs that aren’t eligible for inclusion, expenditure with no supporting documentation, or claims that don’t match the conditions of the grant – can lead to UKRI clawing back funds. In extreme cases, your organisation could be barred from future Innovate UK funding.
The audit report goes directly to Innovate UK. A qualified auditor who specialises in grant work will help you get the report right the first time, reducing the risk of delays or rejected claims.
Choosing the right auditor for Innovate UK grants
Not every accountant has experience with Innovate UK grant audits. You need someone who understands UKRI’s rules, the IAR format, and what the funding body actually looks for when reviewing the audit report.
Key things to look for:
- They must be a registered auditor or hold a practising certificate from a recognised body (ICAEW, ACCA, or equivalent)
- Experience with Innovate UK grants specifically, not just general audit work
- Familiarity with the day rate formula, eligible costs categories, and UKRI reporting requirements
- A track record with similar organisations – whether you’re an SME, a university spin-out, or a larger business
At Audit Group, part of Jack Ross Chartered Accountants, we handle Innovate UK grant audits regularly from our Manchester office. Our audit specialists know what UKRI expects and we help your team resolve issues before the final submission. We’ve worked with research and development businesses across multiple Innovate UK funding rounds, from Smart Grants to collaborative R&D programmes.
If you need an independent accountant’s report for your Innovate UK grant – or any other grant audit service – get in touch. Call us on 0161 832 4451 or visit our contact page.
Read more about our grant audit services or our wider statutory audit work.
