DrawHouse warns VAT changes could slash prize draw operator margins

DrawHouse, a B2B prize-draw platform, has issued a warning to UK prize draw operators over potential changes in the treatment of VAT by HM Revenue & Customs (HMRC). 

The company believes that the reinterpretation of VAT rules could reduce operator margins by as much as 25%-30%, while also exposing businesses to sizeable retrospective tax bills.

HMRC’s confirmation

Historically, much of the UK prize draw industry has operated on the understanding that VAT did not apply to paid entries where free-entry routes were offered. However, recent correspondence from HMRC to several operators has indicated a shift. 

Paid entries to prize draws, even those complying with the Department for Digital, Culture, Media & Sport’s (DCMS) voluntary code, are now viewed as subject to VAT at the standard rate.

In answer to a parliamentary question in February, Dan Tomlinson the exchequer secretary confirmed on behalf of HMRC that “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, described the issue as no longer theoretical. “VAT and taxation are not a discussion for the future,” he said. “They are a live, immediate commercial concern being prioritised by operators across the market.”

While HMRC’s stance is clear, tax advisers have indicated that existing legislation does not definitively support this interpretation. This comes during a period of frequent developments in the UK prize draw industry’s regulation. 

The Prize Competition Council (PCC) officially launched as a trade association representing the UK’s prize draws sector in July. The body will aim to bring together more than 50 operators to promote responsible standards, enhance player protections and encourage long-term development.

Financial impact 

Based on DrawHouse’s modelling, an operator typically enjoying a 50% gross margin on individual draws could see this margin fall by around 25%-30%, which might even be nearer to 35% under a straightforward application of VAT on ticket sales.

Despite this reduction, DrawHouse points out that prize draw margins would remain comparatively higher than those in sectors like sportsbooks and casinos, which often face single-digit or low double-digit margins before factoring in operational expenses.

More concerning, Pinner said in a statement today, is the prospect of retrospective tax liabilities. 

Many prize draw operators have reinvested past profits into marketing, technology, recruitment, or prize pools, and unexpected tax bills for prior years could jeopardise financial stability. Pinner noted: “Adapting to a lower-margin future is one thing. Finding cash to settle an unexpected historic liability is a different ask entirely.”

Ending on a positive note

Pinner emphasised the potential for positive 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,” he continued. “The businesses that build for the market as it will be, rather than the market as it was, may emerge better capitalised and positioned than before.”