VAT on prize draw tickets

HMRC is now writing to businesses

HMRC has confirmed its position that prize draws with both a paid and a free entry route are not exempt from VAT, and it has now begun writing directly to the businesses affected. If your organisation sells tickets into a draw like this, the practical question is no longer whether HMRC might challenge treating the sales as VAT exempt, but whether you have already received one of these letters, or should expect one.

Is VAT payable on prize draw tickets?

On 17 February 2026, a Treasury minister confirmed the stance in a written parliamentary answer that prize draws offering both a paid and a free entry route do not qualify for VAT exemption, and that paid entries are taxable at the standard rate of 20%. The question was prompted by a new voluntary code of conduct for prize draw operators, which took full effect from 20 May 2026.

This is not without controversy as historically many prize draw operators took the view that sales fell either outside the scope of VAT or within the exemption for betting, gaming and lotteries. It now seems likely that one or more operators may seek to manage a legal challenge.

HMRC is already writing to businesses

HMRC has followed the parliamentary answer with One to Many (nudge) letters sent directly to businesses that run prize draws. The letters set out HMRC’s position that prize draws are not VAT exempt, note that some businesses are not correctly accounting for VAT on ticket sales, and ask recipients to check their records and correct their VAT treatment going forward.

Anyone who has undercharged VAT based on HMRC’s stated view and does not come forward even after receiving a nudge letter risks investigation and higher potential penalties even if the treatment they adopted was based on an honest interpretation of the VAT rules.

HMRC’s factsheet CC/FS7a sets out how these penalties are calculated.

Why does a free entry route change the VAT position?

VAT does not exempt gambling in general. It exempts certain forms of gambling – including lotteries specifically, and a lottery has a strict legal test under gambling law. One requirement is that everyone entering has to pay. As soon as a promoter offers a free way to enter, the arrangement is no longer a lottery in law, it becomes a free draw or prize competition, and it can run without a lottery licence.

That is often why the free route exists in the first place: many promoters build it in specifically to avoid the licensing requirements that apply to a lottery, rather than for any tax reason. Whatever the original motivation, the effect is the same. The VAT exemption covers genuine lotteries or ‘games of chance’ where there is an element of individual participation, so the same free entry route to a prize draw that keeps it legal without a licence is also what moves it outside of the VAT exemption.

A parliamentary answer and a nudge letter are not a tribunal ruling. HMRC has taken a firm position before on where gambling activity sits for VAT purposes and lost, most notably in a decade-long dispute over the ‘spot the ball’ football competition, where the Court of Appeal ultimately ruled against HMRC in 2016 and it repaid around £97 million. That case turned on a different point of law and is not a direct precedent for prize draws, but it shows HMRC’s first position in this area does not always hold.

Does this affect charity prize draws too?

Charities have used the paid-and-free structure for years, usually to fundraise through a prize draw without needing a lottery licence. A charity that has treated ticket income as VAT exempt because it looks and feels like a raffle may be relying on a structure that gambling law does not actually treat as a lottery, and could receive one of HMRC’s letters on that basis. This is separate from the existing Gift Aid position, where payment for a raffle or draw ticket has never qualified for Gift Aid, because it buys a chance to win rather than being a gift.

What should you do if you run a prize draw?

If you have received a One to Many letter from HMRC, respond within the timeframe it gives, even if you believe your VAT treatment is already correct – either because you have adopted a position consistent with HMRC’s view of the law or you disagree with HMRC’s view of the law and wish to challenge it.
Check whether any current prize draws or fundraising draws use both a paid and a free entry route.
Review whether output VAT has been charged and accounted for on paid entries to date.
Work out the exposure if HMRC’s position is confirmed, including any VAT due on past ticket sales, before HMRC raises it with you.
Consider whether the position needs disclosing under the uncertain tax treatment rules, if the business is large enough to fall within them.
Seek a VAT review before launching or renewing a paid-and-free prize draw, rather than after.

How can Price Bailey help?

Price Bailey can support you with all of the above if you receive a nudge letter from HMRC. If your organisation runs a paid-entry prize draw, or has received a letter from HMRC about one, contact our Price Bailey VAT team for a free initial call.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information on this page is intended as a general guide only. While we work to keep our content accurate and up to date, we cannot guarantee that it reflects the position at the time you are reading it. No responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm. For more information on our editorial process, click here.

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