UK prize draws: HMRC scrutiny of VAT treatment

HMRC is scrutinising the VAT treatment adopted by operators of prize draws offering both paid and free entry routes.

HMRC’s stated position is that such arrangements are not exempt lotteries and that paid entries are subject to VAT at the standard rate of 20%. In its one-to-many campaign letter, HMRC has already written to businesses in the sector asking them to review their VAT treatment given that operators have been adopting a mix of different VAT treatments.

The issue is potentially significant for operators, particularly for those that have been treating prize draws, offering both paid and free entry routes, as VAT exempt, given the scope to challenge HMRC's position.

Uncertainty and potential challenge to HMRC's view

Prize-draw operators commonly offer:

1. a paid route, under which customers purchase entries for the chance to win a prize; and
2. a free postal route, designed to ensure that the arrangement does not constitute a “lottery” requiring regulation under the Gambling Act 2005.

Group 4, Schedule 9, The Value Added Tax Act 1994 (VATA) exempts, among other things, “the granting of a right to take part in a lottery”. However, the legislation does not define “lottery”.

HMRC considers that the definition in the Gambling Act 2005 should apply for VAT purposes. This definition of lottery contains the following elements:

(a) persons are required to pay to participate in the arrangement;

(b) prizes are allocated to entrants; and

(c) the prizes are allocated by a process which relies wholly on chance.

In HMRC's view, because a genuine free-entry route means that participants are not required to pay to participate, it considers that the arrangement is not a lottery and that paid entries are standard-rated.

There are, however, credible grounds for challenging HMRC’s position. In particular, the VAT legislation does not define “lottery” by reference to the Gambling Act 2005, and there is supporting case law and wider VAT jurisprudence for a broader interpretation of the term. The purpose and principles underlying the VAT exemption also provide support for challenging HMRC’s approach. 

Practical considerations

Operators should consider:

• Reviewing the historic VAT treatment: quantify the periods and amounts potentially affected and establish why the treatment was adopted. This should include an assessment of any potential VAT, interest and penalties liability.

• Reviewing the free-entry route: consider how it operates in practice, its prominence, the terms and conditions, and the proportion of paid and free entries.

• Preserving evidence: retain draw mechanics, marketing materials, customer terms, entry data, accounting records and relevant tax advice.

• Considering the prospective position: assess whether to follow HMRC’s approach, maintain the exemption position, and/or adopt a protective approach to mitigate any risks.

• Protecting claims and dispute rights: operators contacted by HMRC should consider their response carefully and whether any repayment or other claims need to be protected.

• Separating liability from valuation: if paid entries are ultimately taxable, a further question may arise as to the amount on which VAT is properly due, particularly given the treatment of prizes and associated costs.

How we can assist

We recommend obtaining specialist advice to assist with managing the position if you have received a one-to-many campaign letter or HMRC have indicated that they intend to investigate the VAT treatment adopted by your business. 

Our team regularly engages with HMRC on VAT matters to achieve swift and effective outcomes for clients. If you would like to discuss this or any other dispute with HMRC, please contact Michelle Sloane or Jasprit Singh.