DrawHouse warns VAT shift could cut prize draw operator margins by 30%

DrawHouse has warned UK prize draw operators that HM Revenue & Customs’ treatment of paid entries could significantly reduce margins across the sector.

The B2B prize draw platform believes the application of VAT at the standard 20% rate could cut operator margins by around 25% to 30%. Businesses could also face retrospective liabilities relating to revenue earned in previous years.

HMRC confirms paid entries are subject to VAT

Many prize draw  businesses have historically operated on the understanding that paid entries were not subject to VAT when an equivalent free-entry route was available.

However, recent HMRC correspondence with operators indicates that paid entries are considered taxable, including when a draw complies with the Department for Culture, Media & Sport’s voluntary code.

Responding to a parliamentary question in February, exchequer secretary Dan Tomlinson confirmed that draws offering both paid and free-entry routes were not eligible for VAT exemption.

He said paid entries would therefore be subject to the standard VAT rate of 20%.

“VAT and taxation are not a discussion for the future. They are a live, immediate commercial concern being prioritised by operators across the market.” – Dan Tomlinson

Jamie Pinner, chief commercial officer at DrawHouse, said the issue had become an immediate commercial priority. However, tax advisers have reportedly questioned whether the existing legislation definitively supports HMRC’s interpretation.

DrawHouse models significant margin reduction

DrawHouse estimates that an operator achieving a gross margin of 50% on an individual draw could experience a margin reduction of approximately 25% to 30%.

Under a straightforward application of VAT to ticket sales, the impact could be closer to 35%.

Despite this, DrawHouse noted that prize draw businesses could retain comparatively stronger margins than sportsbooks and online casinos. Operators in those sectors frequently work with single-digit or low double-digit margins before operating expenses are deducted.

Retrospective liabilities present greater concern

Pinner suggested that historic tax demands could pose a more serious threat than lower margins on future draws.

Operators may have already reinvested previous profits into marketing, technology, staff recruitment or larger prize pools. Consequently, some businesses may not have sufficient cash available to cover an unexpected liability covering several years.

“Adapting to a lower-margin future is one thing,” Pinner said. “Finding cash to settle an unexpected historic liability is a different ask entirely.”

Prize draw sector prepares for change

The warning comes during a period of wider change for the UK prize draw industry. The recently launched Prize Competition Council plans to bring together more than 50 operators to strengthen standards, player protections and the sector’s long-term development.

Pinner said a more disciplined and transparent market could ultimately benefit established operators and trusted service providers.

“Taxation may reshape the prize draw market, but it does not remove the opportunity,” he said. “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.”