According to an article in The Times years ago (early 2000s?) the money was used notes from the Bank of England that was going to be burned anyway. With insurance, security, and a BoE employee to supervise it was expensive, but not a million pounds expensive. That said, I could imagine the KLF inventing this story too, so I don't know what the truth is.
I heard at least part of this version of the story a few years ago from someone who was in the British music industry at the time. I seem to recall getting the impression that he was relaying what he'd heard at the time, but of course I can't rule out that he got it from the Times article you mentioned.
