DrawHouse, a business-to-business prize draw platform, has raised concerns among UK operators regarding potential changes in VAT treatment by HM Revenue & Customs (HMRC).
The company warns that the reinterpretation of VAT regulations could lead to a reduction in operator margins by 25-30% and could also result in significant retrospective tax liabilities for businesses.
Historically, the UK prize draw industry operated under the assumption that VAT exemptions applied to paid entries when free-entry options were available. However, recent communications from HMRC to multiple operators suggest a shift in this understanding.
Current guidance indicates that paid entries for prize draws, even those that adhere to the Department for Digital, Culture, Media & Sport (DCMS) Voluntary Code, are now subject to VAT at the standard rate. In response to a parliamentary question in February, Exchequer Secretary Dan Tomlinson confirmed, "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%."
Jamie Pinner, chief commercial officer of DrawHouse, emphasized the urgency of the situation, stating, "VAT and taxation are not a discussion for the future, they are a live, immediate commercial concern being prioritized by operators across the market." Despite HMRC's clear position, tax advisors assert that existing laws do not definitively support this updated interpretation, amid the ongoing regulatory developments within the UK prize draw sector.
In July, the Prize Competition Council (PCC) was established as a trade association aimed at representing the UK’s prize draw sector, bringing together more than 50 operators to enhance responsible standards and improve player protections.
Financially, DrawHouse has modeled that an operator usually enjoying a 50% gross margin on individual draws might see this margin decrease by approximately 25-30%, potentially falling to around 35% with the straightforward application of VAT on ticket sales. However, DrawHouse notes that even with this reduction, prize draw margins would still be higher than those in other sectors such as sportsbooks and casinos, which often operate with single-digit or low double-digit margins before accounting for operational expenses.
Pinner expressed greater concern about the possibility of retrospective tax burdens, as many prize draw operators have reinvested their past profits into marketing, technology, recruitment, or prize offerings. Unexpected tax liabilities from previous years could threaten their financial stability. Pinner remarked, "Adapting to a lower-margin future is one thing. Finding cash to settle an unexpected historic liability is a different ask entirely."
Despite these challenges, Pinner concluded on a constructive note, referring to the possibility of market evolution: "Structural change creates winners as well as losers. A more disciplined, transparent, and professional market benefits serious operators and trusted infrastructure providers alike. Taxation may reshape the prize draw market, but it does not remove the opportunity. The businesses that build for the market as it will be, rather than the market as it was, may emerge better capitalized and positioned than before."
