I think I have it now, based on your response and some subsequent searching -
When you upload a sketch, you're using the Arduino bootloader, a small program that has been loaded on to the microcontroller on your board. It allows you to upload code without using any additional hardware.
I will have a go at using optiLoader to put a boot loader on the ATMega8, I assume I can then put it into the UNO in place of the ATMega328 and upload test sketches.
Assumming this goes to plan I want to have a go at configuring the fuses to use the internal oscillator for some low cost projects.
Thanks for the pointers,