HMRC has begun issuing One to Many letters, also known as nudge letters, to prize draw operators about its view that VAT is due on paid entry fees. With a tribunal challenge expected later this year, affected businesses should review their position carefully before responding.
Background
Prize draws have become an increasingly visible part of the consumer promotions market. Many operators offer paid ticket entries alongside a free postal or alternative entry route, often relying on distinctions in gambling law between lotteries, competitions and prize draws.
However, the VAT position is separate from the regulatory position. Earlier this year, a written Parliamentary question asked whether ticket sales for prize draws offering both paid and free entry routes, would be eligible for VAT exemption. The Treasury response, answered on 17 February 2026, confirmed HMRCs view that prize draws offering both paid and free entry routes are not eligible for VAT exemption, and that paid entries are subject to VAT at the standard rate of 20%. (Written questions and answers – Written questions, answers and statements – UK Parliament)
This has significant implications for operators who have not accounted for output VAT on paid prize draw entries. If HMRC considers that VAT should have been declared, the exposure may not be limited to future sales and could include assessments for previous VAT periods, depending on the facts and applicable time limits.
What HMRC are saying
HMRC has now started a One to Many campaign focused on VAT and prize draw ticket sales. These letters are designed to prompt taxpayers to review their own position and take action where needed.
The Chartered Institute of Taxation has confirmed that HMRC has contacted it and other stakeholders to say that letters are being issued to relevant businesses. Recipients are being asked to review their VAT accounting position for prize draw entry fees and to contact HMRC if they identify that corrections are required. A copy of the letter can be found One to Many Campaign – VAT on sales of prize draw tickets | Chartered Institute of Taxation
A One to Many letter is not, in itself, the same as a formal VAT assessment or compliance check, but it should not be ignored. Businesses receiving a letter should involve their VAT advisers quickly, particularly where the issue affects historic VAT returns, pricing models, customer terms, accounting systems, or cash flow.
Why the VAT position is difficult
The VAT treatment of prize draw income can be complex. The key issue is whether the payment made by a customer for entry into a draw is consideration for a taxable supply, and whether any VAT exemption can apply.
HMRCs current view, as reflected in the Parliamentary answer and the One to Many campaign, is that paid entries into prize draws with both paid and free entry routes are standard-rated. In practical terms, HMRC is saying that output VAT should be accounted for on the paid entry fee at 20%.
For affected operators, this can create a commercial issue as well as a technical VAT issue. If ticket prices were set on the basis that VAT was not due, a retrospective VAT liability may reduce margins unless there is a contractual or practical ability to recover VAT from customers. In most consumer-facing prize draw models, that may be difficult.
Tribunal challenge expected
We understand that a major prize draw operator is challenging HMRCs view before the First-tier Tribunal. The case is expected to be heard this autumn, with a decision likely in spring 2027.
If the case proceeds as expected, it may become an important test case for the sector. While each operator will need to consider its own facts, the outcome could provide much needed clarity on HMRCs position and on how the VAT rules apply to paid entries into prize draws.
In the meantime, operators receiving adverse decisions, VAT assessments or other HMRC correspondence should not assume that the position is settled. Depending on the circumstances, it may be appropriate to appeal and ask HMRC to stand matters behind the tribunal proceedings while the wider sector issue is considered. Where immediate payment would create cash flow pressure, businesses may also need to consider whether hardship or Time to Pay options are available.
What should prize draw operators do now?
Businesses operating prize draws should take the HMRC campaign seriously, but should also avoid making rushed decisions without understanding the technical and financial consequences.
Practical steps include:
- Review the VAT treatment currently applied to paid prize draw entries.
- Quantify potential exposure for historic periods and future sales.
- Consider whether disclosures or corrections are required.
- Assess whether an appeal may be appropriate if HMRC issues a decision or assessment.
How Xeinadin can help
The VAT treatment of prize draw income is now firmly on HMRCs radar. With HMRC issuing One to Many letters and a tribunal challenge expected, operators should ensure that their VAT position is reviewed carefully and that any response to HMRC is managed strategically.
The Xeinadin VAT team can help prize draw operators to:
- Review the VAT liability of paid entry fees.
- Assess historic VAT exposure.
- Support appeals against assessments or decisions.
- Monitor developments in the expected tribunal case.
If you have received a letter from HMRC, or you are concerned about the VAT treatment of prize draw ticket sales, please contact the Xeinadin VAT team.
