UK VAT treatment of prize draws receives renewed scrutiny

The UK chancellor was asked to confirm how ticket sales for prize draws offering both paid and free entry routes are subject to VAT under the Value Added Tax Act 1994.

The question, submitted to the House of Commons by Maureen Burke, the Labour MP for Glasgow North East, on 9 February asked how the VAT on such draws should be treated in light of the new voluntary code of conduct, which seeks to provide guidance for prize draw operators to strengthen protection for consumers and improve integrity and transparency across the industry. 

On 17 February a Treasury minister confirmed HMRC’s position “that prize draws offering both paid and free entry routes are not eligible for VAT exemption and paid entries will be subject to VAT at the standard rate of 20%”.

Bryn Reynolds, a VAT expert at Pinsent Masons, said the answer was particularly illuminating as questions persist over the clarity of HMRC’s position on this issue. "HMRC has previous form in adopting an overly restrictive view of the betting, gaming and lotteries VAT exemption, when they had to pay out £97 million in 2016 in relation to ‘spot the ball’ games which HMRC considered fell outside the exemption,” he said. “The position here is similarly complex and may consider similar issues. It is far from clear that HMRC's position here is correct and given the potential sums involved in the industry, litigation and continuing uncertainty for the sector seems inevitable."

The Department for Culture, Media and Sport commissioned independent research into the prize draws sector in 2023, which indicated that the UK prize draw market is worth £1.3 billion annually with 7.4 million adult participants and over 400 operators. This research revealed that 88% of prize draw participants also participated in commercial gambling activities and lotteries over a 12-month period. This is compared with 60% of adults who gamble in the general population – demonstrating the increasing significance of this growing market to the UK economy.

Commenting on the Treasury’s response in parliament, Reynolds added: "Large businesses adopting a tax position contrary to HMRC's ‘known’ position are required to disclose this in certain circumstances under the uncertain tax treatment legislation. Whether a statement by a Treasury minister on behalf of HMRC is sufficient to constitute HMRC's known position is an interesting question. Even where businesses intend to challenge HMRC's position they may want to consider whether they are required to disclose their position." 

Scott Oxley, a prize competition expert with Pinsent Masons, said the introduction of the voluntary code, which will take full effect from 20 May 2026, would provide the ideal opportunity for HMRC to clarify its position for draw operators: "The rapid growth of the prize-draw sector has inevitably led to greater regulatory scrutiny which culminated in the adoption of the voluntary code to which signatories have agreed to implement no later than 20 May 2026. It is unsurprising that the tax position is now under a spotlight with significant commercial implications for the industry if HMRC's position is held to be correct."