Prize draws in the UK could be looking at a single major change in how they operate, that being the potential introduction of VAT to the paid-entry route.
The debate around whether the sector should be subjected to a value-added tax was brought back into the spotlight earlier this year thanks to a comment made by Exchequer Secretary to the Treasury, Dan Tomlinson MP.
Responding to a query about prize draw taxation, Tomlinson confirmed that tax authority His Majesty’s Revenue and Customs (HMRC) sees prize draws offering both paid and free-entry routes as non-eligible for a VAT exemption, and that paid entries “will be subject to VAT at the standard rate of 20%” – falling short of providing an exact deadline of when that “will” is going to happen.
Regardless, this is a rather clear indication that the VAT stamp is likely inevitable. This sentiment is also shared by Jamie Pinner, Chief Operating Officer at DrawHouse, who said that prize draw operators “should stop debating whether change is coming and start preparing for it”.
Pinner alleged that several operators have already been contacted directly by HMRC about the VAT treatment of their business, which Lottery Daily could neither confirm or disprove independently.
If true, however, we could be looking at a very different prize draws sector 12 months on from today.
Prize draws have been operating under the assumption that because they offer free-paid entries, choosing to pay for a chance to win therefore does not attract VAT. This free route is essentially why prize draw operators are not regulated as gambling entities nor lotteries.
The HMRC is now seemingly looking to challenge that assumption, focusing solely on the paid route as a payment in exchange for a service despite the existence of a free alternative.
On top of whether the government will go through with imposing a VAT rate, two other big questions also remain – will it tax every pound of a ticket sold or will it tax gross wins, and will it apply retrospectively?
Whatever the case might be, a 20% VAT rate will indeed have a knock-on effect on the entire prize draw sector. Most of the following lines are just theoretical scenarios as to what that effect might be.
Dropping the free-entry route?
One interesting scenario that springs to mind is whether prize draw operators can drop the free-entry route. This is a most certain ‘no’ if they want to continue doing business as before.
Making that step would mean that they will either need to reclassify as a lottery – which is a tough endeavour since the sector is heavily regulated and commercial lotteries are not generally allowed without an appropriate legal basis – or pivot towards other forms of gambling and completely reimagining their product.
What we can say for certain is not happening is prize draw operators starting to push their free entry route as a priority, as encouraging free participation would essentially undermine their own income.
Higher ticket prices to absorb costs
A more probable scenario would be an increase in ticket costs, which could be coupled with slight price value reduction, lower marketing budgets, lower profits, or a combination of all four.
The price increase would almost certainly happen, however, as a general rule of thumb when markets want to absorb higher costs.
No danger of prize draws disappearing
The prize draws sector itself is also in no danger of disappearing anytime soon, as VAT can simply not outweigh the customer demand that draws attract. The biggest change that could happen is for VAT to make the industry slightly less lucrative than it was before.
Even if it does end up with lower margins, Pinner argues that the prize draws sector will still perform better than sportsbooks and casino products.
“Prize draws are attractive because they are simple to understand, the prizes are aspirational, and the product is highly marketable. Their tax treatment was not the only appeal, and the economics remain compelling even if that treatment arises,” he said.
“Customers are buying a dream and a modest change in ticket price won’t change the core appeal of the product.”
VAT could lead to market consolidation
One other dynamic that could emerge from the introduction of VAT is smaller operators finding it difficult to cope given their limited cash reserves, especially if VAT is applied historically.
This could lead to market consolidation and increased M&A activity.
Change is in the air regardless
The biggest drawback, however, remains the current period of legal uncertainty. It is more than evident that the UK prize draws sector is undergoing significant change.
Last year saw the introduction of the DCMS Voluntary Code of Good Practice for Prize Draw Operators, which finally consolidated prize draws regulation after a period of fragmented oversight divided among several UK authorities.
This July, the sector also got its first-ever trade association to represent it, with more than 50 operators brought together by the Prize Competition Council.
The potential VAT rollout is just another change that prize draw operators need to stay on top of.