VAT on Competition Entry Fees and Prize Money

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Good afternoon all. I am hoping you can assist with my query on this, or at least either confirm/deny my thoughts.

A sole trader is in the business of organising tournaments. The games are pool or darts, all games of skill so this is not a lottery or games of chance. This is the only activity of the business.

The business model is to charge an entry fee to competitors, to keep a percentage of this (say 10%), and pay the remainder out in prize money (90%).

When under the VAT threshold this seems fine. For a tournament of 30 people with an entry fee of £10, turnover would be £300, prize money would be £270, profit would be £30. 

However, if the business grew to the point that it breached the VAT threshold, things would change. According to VAT Notice 701/45, Entry fees are standard rated unless either all of the entry fee money is paid out as prizes (not applicable in this case), or if the organisation is a non-profit (not applicable in this case). Therefore the full amount of the entry fees counts as turnover, and VAT is due at 20% on this. According to VAT Notice 701/5, Prize money is outside the scope of VAT so there is no deduction for the amount paid out to competitors.

Therefore if the business wanted to charge the same entry fee of £10 and still make £30 per tournament, the prize money would have to be reduced to £220, meaning competitors would only recieve 73% of their entry fees as prizes instead of 90%. That's a big change and would make the tournaments much less attractive to customers. Continuing to pay out 90% would result in a loss of £20 (£300 entry fees - £50 VAT - £270 prizes = £20 loss).

In contrast, according to VAT Notice 701/29 if this were a poker tournament or other game of chance, the prize money would be deductable from the entry fees, meaning output VAT would only be due on the "profit" made by the organisers.

If this were the case for games of skill, the business could make £30 by paying out £87.5% (Entry fees £300, Prizes £263, VAT of £7), which is very similar to the 90% paid out pre-registration.

Does anyone have any expertise in this area to confirm I am right in what I am saying above, that there is essentially a large penalty for breaching the VAT threshold if your business model is organising competitions for games of skill in comparison to an equivalent business organising competitions for games of chance?

I presume that any attempt to circumvent this by splitting the entry fee into a "prize pool" which is paid out 100% and therefore Exempt, and an "admin fee" which is kept by the business and therefore Standard Rated would be fruitless, as in reality if both amounts are mandatory they would be seen as a single fee for tournament entry by HMRC?

Thanks in advance for any thoughts on this.

Replies (3)

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By paul.benny
24th May 2024 15:34

As the proper VAT experts haven't yet pronounced, I'll vote yes to your analysis.

A bit less confident that splitting the entrance fee would not work. You may need an option not to participate in the prize fund but you could also exclude from a prize those who don't paying. Downside is the risk that too many will opt out

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By williams lester accountants
26th May 2024 09:36

Why is poker quantified as a 'game of chance'? That seems to mean anyone could enter and have equal opportunity to win, which i don't think is the case.

Also, I have been in single frame pool tournaments where I (and others) have not even left their chair, so there is a 'chance' I may not get an opportunity to show any skill on the table if the opponent has first break!

This all sounds a bit of a mess......

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Replying to williams lester accountants:
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By Yeadonian
26th May 2024 11:43

According to VAT Notice 701/29:

‘Game of chance’ is defined in Note 2 of Group 4 of Schedule 9 to the Value Added Tax Act 1994. Essentially, it is either a game of:

- pure chance, such as dice or roulette, where the result cannot be influenced by the player
- chance and skill combined, such as whist or rubber bridge, where the player either cannot eliminate chance or can only do so by exercising superlative skill
These supplies are exempt from VAT.

Many other games including any athletic games or sports are not regarded as games of chance. The supply of a right to play games of skill is standard-rated, for example:

-certain spot the ball competitions (see paragraph 2.6)
-duplicate bridge
-chess
You will therefore need to distinguish carefully between the games of chance and the games of skill which you promote.

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