HMRC has launched a new compliance campaign aimed at businesses that sell prize draw tickets, signalling increased scrutiny of a rapidly growing sector. The campaign, which has been highlighted by the Chartered Institute of Taxation (CIOT), focuses on HMRC's view that output VAT is due on paid prize draw entryfees and encourages affected businesses to review their VAT treatment and make any necessary corrections.
For businesses operating prize draws, competitions and similar promotional models, the campaign could have significant financial and compliance implications.
What is HMRC's One to Many campaign?
A "One to Many" campaign, often referred to as a nudge letter campaign, is used by HMRC to contact groups of taxpayers where it believes there may be widespread misunderstanding or non-compliance surrounding a particular tax issue.
Letters have been sent directly to businesses rather than their appointed tax advisers, although recipients are encouraged to share the correspondence with their advisers.
Why is HMRC focusing on prize draw tickets?
Prize draws have become an increasingly popular consumer product in recent years, with businesses offering customers the opportunity to win high-value prizes ranging from vehicles and holidays to luxury goods and cash. Government research published last year estimated the potential size of the market at over £2 billion.
Many operators offer both paid entry routes and free postal or alternative entry mechanisms. Historically, some businesses have taken the view that these arrangements fall within VAT exemptions that apply to certain gaming, betting and lottery activities.
However, HMRC's position is that prize draws which offer both paid and free entry routes do not qualify for VAT exemption, and that paid entries should therefore be subject to VAT at the 20% standard rate. This position was confirmed by the Exchequer Secretary to the Treasury in a parliamentary response earlier this year and forms the foundation of HMRC's current compliance campaign.
What are the risks for affected businesses?
The potential implications extend beyond future ticket sales.
Businesses that have not historically accounted for VAT on paid prize draw entries may face exposure to:
- Historic VAT assessments
- Interest on underpaid VAT
- Potential penalties
- Cashflow challenges
- Pricing and margin pressures
- Increased compliance scrutiny
While the One to Many letter itself is not a formal VAT assessment, it should not be ignored. HMRC is effectively providing businesses with an opportunity to review their position and voluntarily correct any errors before further compliance activity takes place.
Where a business later discovers an error but fails to engage with HMRC, any subsequent disclosure may be treated as prompted rather than unprompted, which can have implications for penalty mitigation.
What should affected businesses do now?
Businesses involved in prize draws, competitions or promotional schemes that include paid entry routes should proactively review their VAT position.
Areas that should be considered include:
Reviewing current VAT treatment
Assess whether output VAT is currently being accounted for correctly on entry fees and related income streams.
Assessing historic exposure
Review previous VAT periods to determine whether there may be potential underdeclared VAT liabilities.
Evaluating pricing models
Consider the commercial impact of accounting for VAT on future ticket sales, including margins and customer pricing.
Reviewing systems and processes
Ensure accounting systems, VAT coding and reporting procedures reflect the correct VAT treatment.
We’re here to help
The VAT treatment of prize draw ticket sales is a specialist area that sits at the intersection of indirect tax, compliance and commercial decision-making. With HMRC now actively targeting the sector, businesses should ensure they understand both the immediate and longer-term implications.
Our VAT specialists can help businesses:
- Review whether VAT has been correctly accounted for on prize draw entry fees
- Assess historic VAT exposure and potential liabilities
- Consider disclosure options where corrections may be required
- Review pricing structures and commercial impacts
- Evaluate accounting processes and VAT controls
- Support correspondence and discussions with HMRC
If your business has received one of these HMRC One to Many letters, or you operate prize draws or are uncertain about the VAT treatment of entry fees, now is the time to review your position. Early advice can help minimise risk, manage potential liabilities and ensure your business remains compliant with HMRC's latest guidance.
Contact our team of specialist VAT advisers today.
