If there was still any doubt about HMRC’s intentions towards the prize draw sector, that doubt has now disappeared.
Since the Treasury’s response to the Parliamentary Question posed in February, the industry has been debating the VAT treatment of prize draws.
HMRC has now issued ‘nudge’ letters to prize draw operators across the sector, including both VAT registered and unregistered businesses.
The letters leave little doubt as to HMRC’s view. HMRC consider that prize draw entry fees are subject to VAT and is encouraging operators to review their position and consider whether they have any historic VAT exposure.
HMRC do not regard prize draws as ‘games of chance’ for VAT purposes because they lack a sufficient degree of participation to constitute a game. There is now little disagreement on this point: prize draws fall outside the VAT exemption for games of chance.
That is not, however, the end of the story. There remain strong arguments that prize draws are exempt as lotteries for VAT purposes, even if they are not lotteries for the purposes of the Gambling Act 2005. In broad terms, the argument is that the VAT exemption originates from European VAT law and that ‘lottery’ should be interpreted as a VAT concept rather than by reference to UK gambling regulation. If that is correct, a competition can fall outside the Gambling Act definition of a lottery because it offers a free entry route, yet still qualify as a lottery for VAT purposes. Support for this approach can be found in long established principles that VAT exemptions for betting and gaming should be interpreted autonomously and consistently, without being driven by domestic regulatory classifications. The key issue is therefore whether a prize draw may still constitute a lottery for VAT purposes, notwithstanding that it is not considered to be a lottery under the Gambling Act.
Even should HMRC ultimately prevail, questions still remain around how any resulting VAT liability should be calculated.
For operators that have not accounted for VAT on entry fees, receipt of a nudge letter changes the landscape. Affected businesses should now be quantifying their historic exposure and considering how best to engage with HMRC. This is because the timing and manner of that engagement may have a significant impact on the final penalty position if HMRC ultimately succeeds in its challenge.
Importantly, a major prize draw operator is challenging HMRC’s view before the First-tier Tribunal. The case is expected to be heard this autumn, with a decision likely in spring 2027.
This means prize draw operators receiving adverse decisions or assessments from HMRC may appeal and await the outcome of what is effectively a test case for the sector. Depending on the circumstances, hardship applications and Time to Pay arrangements may also help manage any immediate cashflow impact.
If there was still any doubt about HMRC’s intentions towards the prize draw sector, that doubt has now disappeared.
Since the Treasury’s response to the Parliamentary Question posed in February, the industry has been debating the VAT treatment of prize draws.
HMRC has now issued ‘nudge’ letters to prize draw operators across the sector, including both VAT registered and unregistered businesses.
The letters leave little doubt as to HMRC’s view. HMRC consider that prize draw entry fees are subject to VAT and is encouraging operators to review their position and consider whether they have any historic VAT exposure.
HMRC do not regard prize draws as ‘games of chance’ for VAT purposes because they lack a sufficient degree of participation to constitute a game. There is now little disagreement on this point: prize draws fall outside the VAT exemption for games of chance.
That is not, however, the end of the story. There remain strong arguments that prize draws are exempt as lotteries for VAT purposes, even if they are not lotteries for the purposes of the Gambling Act 2005. In broad terms, the argument is that the VAT exemption originates from European VAT law and that ‘lottery’ should be interpreted as a VAT concept rather than by reference to UK gambling regulation. If that is correct, a competition can fall outside the Gambling Act definition of a lottery because it offers a free entry route, yet still qualify as a lottery for VAT purposes. Support for this approach can be found in long established principles that VAT exemptions for betting and gaming should be interpreted autonomously and consistently, without being driven by domestic regulatory classifications. The key issue is therefore whether a prize draw may still constitute a lottery for VAT purposes, notwithstanding that it is not considered to be a lottery under the Gambling Act.
Even should HMRC ultimately prevail, questions still remain around how any resulting VAT liability should be calculated.
For operators that have not accounted for VAT on entry fees, receipt of a nudge letter changes the landscape. Affected businesses should now be quantifying their historic exposure and considering how best to engage with HMRC. This is because the timing and manner of that engagement may have a significant impact on the final penalty position if HMRC ultimately succeeds in its challenge.
Importantly, a major prize draw operator is challenging HMRC’s view before the First-tier Tribunal. The case is expected to be heard this autumn, with a decision likely in spring 2027.
This means prize draw operators receiving adverse decisions or assessments from HMRC may appeal and await the outcome of what is effectively a test case for the sector. Depending on the circumstances, hardship applications and Time to Pay arrangements may also help manage any immediate cashflow impact.
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