HMRC has submitted a one-to-many campaign letter reminding prize draw operators that they are subject to the standard 20 per cent VAT rate.
The sector is booming, with around 7.4 million adults spending roughly £1.3 billion on prize draws and competitions in a year, according to Government statistics.
Whether prize draws offer free or paid entry, HMRC encourages operators to review their VAT treatment and get in contact if they need to make corrections.
Further guidance has been published via an online tool, which can help businesses decide how to correct any VAT errors.
Is VAT payable on prize draw tickets?
HMRC doesn’t classify prize draws as ‘games of chance’ as they do not involve enough participation to be defined as a game.
While casino games, sports betting and bingo are exempt from VAT, prize draws do not get the same treatment.
Echoing a statement from a Treasury minister, Dan Tomlinson, HMRC wants to remind operators that prize draws with both free and paid entry routes are taxable for VAT.
The free entry route is what many operators once thought protected them from VAT, but HMRC’s nudge letter confirms the opposite.
A silver lining of this VAT treatment is that VAT paid on prize draw running costs can become deductible for operators, including those paid during previous tax periods.
While you might discover an outstanding tax bill, you may be able to recover costs elsewhere by claiming back VAT on past expenses.
How should you respond if you operate a prize draw?
The letter does not imply wrongdoing, as it simply acts as an encouragement to check records and correct mistakes.
Firstly, if you have received a letter from HMRC, you should respond within the given timeframe, even if you believe you have no errors to disclose.
You should review whether VAT has been charged and accounted for on paid entries, calculating any outstanding tax owed on past ticket sales.
When deciding if a disclosure is necessary, it’s important to speak to a tax specialist at the earliest stage.
Early intervention can secure the best possible outcome and minimise potential penalties.
An unprompted disclosure, requiring an issue to be flagged to HMRC before they identify it, often yields lower penalties.
Speak to a tax specialist
Our tax specialists can help you respond to nudge letters and structure voluntary disclosures, as early action can mitigate penalties and added scrutiny.
If you have already reinvested profits back into future prize draws, backdated VAT payments can hit cash flow especially hard.
Where this is the case, we can help to negotiate Time to Pay arrangements on your behalf, allowing you to spread the cost and meet liabilities.
Have you received a HMRC nudge letter? Reach out to our tax experts early for guidance on voluntary disclosures and minimising penalties.
