Common failings in Prize draw compliance

As prize draw companies continue to grow in popularity across the UK, they are attracting increased scrutiny from the Gambling Commission and other regulators, particularly where the line between a legitimate prize draw and an illegal lottery becomes blurred. In a recent industry meeting, the Commission’s “illegal markets” team highlighted their concerns and signalled an intensified focus on this space. This is a reminder of the previous white paper proposal to bring some of the larger prize draws under UKGC regulation.

The Commission have stated in relation to ‘illegal markets’, they are looking closely at this sector as historically there have been instances of illegal gambling being discovered.

In Sarah Gardner’s recent speech to the lotteries council, she stated;

“We also need to keep working together on how we tackle illegal lotteries. We know this is an important and troubling issue for you. And alongside other forms of illegal gambling, it’s one we take very seriously as well, as reflected in our Corporate Strategy. We receive hundreds of referrals for potential illegal draws or prize competitions, all of which we review. And if we focus on just one area, during the period 1st August 2024 to 24 April 2025, we have received and referred to our Enforcement team 93 reports of potentially non-compliant free draws and prize competitions. And rest assured where those investigations uncover illegal or non-compliant activity, we take action.”

Below we are outlining some issues which have attracted regulatory attention and pitfalls which operators should be keen to avoid.

Reverse charge VAT

In the UK, when a business buys services from overseas providers, like Facebook and Instagram, it must apply the reverse charge mechanism. The purchaser of the service is responsible for self-declaring output VAT, even if no VAT appears on the invoice. The reverse charge mechanism can be the sole reason for businesses having to register for VAT if the value of their purchases is over £90,000 in any 12-month period, even if it has no other sales subject to VAT.

The reason that this is an issue for prize draw and competition companies is because the raffle ticket sales are deemed an exempt sale, and therefore businesses cannot reclaim in full (partial exemption may apply) the reverse charge output VAT that it has self-declared. This money needs to be paid over to HMRC. Prize draw and competition companies are encouraged to speak to their accountants to ensure compliance, especially when considering correct VAT practice. Reverse charge VAT needs to be reported to HMRC so companies should get independent advice to ensure this is done correctly.

Business owners are urged to check their VAT returns after growing concern that many are failing to report VAT on their Facebook ad spend, a mistake that could cost thousands in backdated tax, interest, and penalties.

We know that the UKGC and HMRC are speaking with each other on categorisations on VAT/tax so we can expect increased scrutiny.

Free Entry Routes – Especially for Instant Win Models

Prize draws often rely on a free entry route to remain compliant and avoid classification as a lottery. The Commission has taken a particular interest in instant win prize draws, expressing concern that many such draws do not offer a meaningful opportunity for free entry. Their guidance (though not formally published) suggests that postal entry must remain open for a suitable time frame so’s not to impede postal entries. Where this is not feasible, operators may need to provide a standard-rate SMS or telephone entry route. This has immediate implications for many fast-turnaround competitions.

Luke ARC has also seen examples where free routes are restricted to a limited number of entries (for example only one free entry being allowed), while paid routes have no such restrictions. Meaning that the product now constitutes illegal/unlicensed gambling, as the free entry route must be no more restricted than the paid route.

Ensuring that free entry routes are legitimate, advertised with equal prominence as paid routes and have an equal chance to win a prize is required to avoid unlicensed and illegal gambling.

Instant win games crossing over into Casino games

It is important to remember that the definition of gaming (referring to Casino games) within the gambling act 2005 does not require a stake. This means that many instant win games, which include gamification before paying out a potential prize can be considered gambling games.

It is more concerning still, that many instant win games are available which actively mimic traditional casino games using roulette style spins or reels similar to a slots game. This increases the risk of these games being defined as casino as opposed too free prize draws.

Self-excluded Gamblers

The Commission and industry are seeing more and more examples of consumers who have self-excluded from gambling, losing funds on prize draw and similar products. Although there are no regulatory requirements for prize draws to operate a self-exclusion scheme, the lack of such controls is drawing attention to the risks of the industry.

Luke ARC would encourage the prize draw industry to look at self-regulation in a similar fashion to the gambling industry’s ‘industry codes’ as a means to ensure regulators and government that these risks are being addressed in lieu of heavier regulation. If you have any queries about ensuring your offerings are compliant, please reach out.