VAT & Prize Draws
HMRC has issued their latest One To Many letter on the VAT treatment of prize draw entry fees.
This was flagged by the CIOT recently who shared the letters that have been are going to businesses operating prize draws, setting out HMRC's view that output tax is due on entry fees and inviting recipients to correct their position. The letters go to the business rather than to its nominated agent, with a suggestion that the recipient may wish to pass a copy on.
The difficulty sits where gambling regulation meets VAT. Granting the right to take part in a lottery is an exempt supply. The VAT legislation does not define a lottery, so HMRC takes the definition used in gambling legislation, which requires that participants must pay to take part, that prizes go to one or more members of a class, and that allocation relies wholly on chance.
Operators structuring a promotion as a prize draw rather than a lottery routinely include a free entry route, often a postal option, to stay outside the regulatory burden of a licensed lottery. That works for gambling purposes. It also means participants are not required to pay to take part, so the arrangement is not a lottery for VAT and the exemption is unavailable. HMRC's published guidance is explicit on the point, and a Treasury minister confirmed in a written answer in February that draws offering both paid and free entry routes are not eligible for exemption.
Paid entries are therefore consideration for a standard rated supply of the chance to win. The Court of Appeal in United Utilities confirmed that the organiser supplies the chance of winning, and that the entry fee is paid for that chance rather than on condition of winning. The prize is a cost of providing the service and falls outside the scope, so there is no netting. On a £12 bundle of tickets, £2 of output tax is due on the full £12.
The analysis carries across to charities and non-profit bodies. Any amount a participant must pay to enter an event or competition is generally standard rated, and a mandatory minimum sponsorship pledge will be treated as an entry fee. Only where participation is open regardless of the amount raised will the money be treated as voluntary donations outside the scope.
For advisers, exposure is measured at one sixth of gross paid entries across the whole period the draw has run, with no credit for the cost of the prizes. Because the letters bypass agents, an adviser may first hear of it when the client mentions it in passing.
