Over the last few weeks, I have spent £20 entering online lotteries. I’ve tried to win a camper van, some camera equipment and a luxury home in London. So far, I’ve won nothing.
What surprised me wasn’t my lack of success, but just how many of these competitions there are. Once you start looking, they’re everywhere. Houses, cars, holidays, watches, cameras and enormous cash prizes, all available for the price of a few lottery tickets. Which got me wondering. How do these businesses make money? Why have so many appeared in recent years? And, crucially, how are they allowed to operate?
The answer turns out to involve some rather peculiar distinctions in British gambling legislation, a potentially expensive dispute with HMRC, and an industry whose business model may depend on making it considerably easier to pay for an entry than to obtain one for free.
The economics of giving things away
At first sight, giving away expensive houses and cars doesn’t look like a particularly promising business model. But the economics are actually rather attractive. Suppose I decide to give away a £100,000 camper van. I sell 50,000 tickets at £5 each, generating £250,000 in revenue. After buying the camper van, I have £150,000 left to cover advertising, administration, payment processing and tax, with whatever remains representing my profit.
Of course, I have to sell the tickets. That may involve spending substantial amounts on advertising, particularly when I’m competing with hundreds of other businesses offering equally attractive prizes. But once I’ve established the website and organised the competition, the marginal cost of selling another ticket is relatively small. Unlike a conventional retailer, I don’t have to purchase another product every time someone places an order. I’m selling the possibility of winning a single product, and I can sell that possibility thousands of times.
This makes online prize draws a potentially lucrative business, particularly when the prizes are sufficiently attractive to generate substantial sales. And it appears that plenty of people have reached the same conclusion. According to research commissioned by the Department for Culture, Media and Sport, the British online prize-draw market was worth approximately £1.3 billion a year, with more than 400 operators and around 7.4 million adult participants. More recent estimates suggest the market may now be worth as much as £2 billion annually. That’s an extraordinary amount of money being spent on the possibility of winning something.
The original research, undertaken by London Economics, found that prizes typically accounted for between 47% and 49% of ticket revenue. In other words, a little under half the money collected was returned to participants in the form of prizes, with the remainder paying for marketing, administration and other costs, and any surplus retained by the operators. If my £20 were spent with a typical operator, around £9.60 might be expected to fund prizes. That doesn’t mean I have a 48% chance of winning something. It means that, across all the tickets sold, the value of prizes represents approximately 48% of the money collected, which is a rather important distinction.
How much money do they actually make?
We can get some idea of how profitable these businesses are by looking at Omaze, one of the largest operators in the industry. Omaze’s UK business generated £196.7 million in revenue in 2024, making a pre-tax profit of £6.2 million, equivalent to a profit margin of just over 3%. The company’s latest accounts show that revenue increased to £239.7 million in 2025, while pre-tax profits more than doubled to £12.8 million, increasing its profit margin to 5.3%.
Those are substantial sums, but they also illustrate that giving away houses isn’t quite the licence to print money that it might initially appear. Omaze has to purchase the properties it gives away, spend considerable amounts on advertising and administration, and makes substantial charitable donations. In 2024, those donations represented approximately 22% of its revenue. It is also worth remembering that Omaze is a rather different business from the smaller operators offering cars, cameras and camper vans. Its expensive prizes, substantial advertising campaigns and charitable commitments create a different cost structure.
Nevertheless, the underlying economics are similar. The operator incurs the cost of providing a prize, then attempts to sell enough entries to cover that cost and generate a profit. The more entries it can sell, the more attractive the economics become. There is, however, an important qualification. The figures I’ve quoted are profits after the company’s existing VAT treatment, and as we’ll discover later, the question of VAT could have a significant effect on the industry’s profitability.
When is a lottery not a lottery?
The more interesting question is how these businesses are allowed to operate. Under the Gambling Act 2005, commercial lotteries are prohibited. The National Lottery operates under its own statutory framework, while society lotteries are permitted to raise money for charities and other good causes, subject to licensing and regulatory requirements. Commercial prize draws, however, can operate outside those restrictions.
There are two principal ways of doing this. The first is to introduce a genuine element of skill into the competition. The second is to provide a free-entry route alongside the paid one. The skill requirement is supposed to be meaningful. Asking participants which day comes after Tuesday isn’t enough to turn a lottery into a competition of skill. The test must be sufficiently difficult to deter a significant proportion of potential participants or prevent a significant proportion of entrants from winning. The alternative is to allow people to enter without paying, and this is where things become rather peculiar.
Take Omaze, which offers the opportunity to win multimillion-pound houses. You can purchase entries online, often in substantial bundles, or you can enter without paying Omaze anything. But the free-entry route involves sending a postcard or letter through the post. You have to provide the required personal information, identify the competition and make sure your entry arrives before the deadline. Each postal entry counts as a single entry, so obtaining hundreds of entries involves sending hundreds of individual applications. Meanwhile, someone purchasing entries can complete the process online in a matter of seconds.
The legislation specifically recognises ordinary first- or second-class post as a qualifying free-entry method. The Gambling Commission’s guidance also requires free-entry routes to be appropriately advertised and entrants to be treated equally when prizes are allocated. So the distinction is legally meaningful, even though the two methods of entering are very different in practice. This is a bit crazy. We have an industry that can operate commercially because people are allowed to enter without paying, but which makes its money because most pretty much no-one takes that option.
The six per cent solution
Fortunately, the government has already investigated how many people actually bother with the free-entry route. London Economics examined the online prize-draw industry on behalf of the Department for Culture, Media and Sport, publishing its findings in 2025. The researchers found that 88% of operators offered a free-entry route for at least some of their competitions, but according to the operators surveyed, fewer than 6% of entries were submitted free of charge. That means the overwhelming majority of entries were paid.
The research also examined how prominently businesses advertised the free-entry option. Of 31 websites reviewed, including Omaze, only one marketed the free-entry route in the same way as the paid options. In most cases, the free-entry arrangements were less conspicuous, often requiring customers to look through the terms and conditions. Among customers who paid to enter competitions, 17% said they didn’t always know how to enter for free, while others cited the inconvenience of the process or the cost of postage. This rather supports my own experience. Until I started investigating the industry, I hadn’t realised that I could enter many of these competitions without buying a ticket.
But the most revealing part of the government research concerns what might happen if free entry became genuinely convenient. The researchers considered the possibility of requiring operators to offer an easy online free-entry route. They recognised that such a change could undermine the commercial model, because customers would have much less reason to pay for something they could obtain without paying. Think about that for a moment. The existence of a free-entry route is what allows many of these businesses to operate outside lottery regulation, but making that route too attractive threatens their profitability. The legal exemption and the commercial incentive pull in opposite directions.
A rather uneven playing field
It gets odder. Traditional lotteries operate under a substantial regulatory framework. Society lotteries, for example, must devote at least 20% of their proceeds to good causes, and there are restrictions on the prizes they can offer. Commercial prize draws are not subject to the same requirements. Some operators, particularly Omaze, make substantial charitable donations, but these are commercial commitments rather than statutory requirements equivalent to those imposed on society lotteries.
A commercial prize-draw operator can therefore compete for much the same consumer spending as a regulated lottery while operating under a different set of rules. This is what economists call regulatory arbitrage. Businesses identify differences between regulatory regimes and organise their activities to take advantage of them. There’s nothing inherently unlawful about that. Indeed, identifying opportunities created by legislation is a perfectly conventional business activity. But it does raise questions about whether the law is treating economically similar activities consistently.
From the customer’s perspective, paying £5 for the chance to win a camper van looks remarkably like buying a lottery ticket. Whether the organiser also allows someone to enter by sending a postcard may make little practical difference to the experience. From the perspective of the Gambling Act, however, that distinction can determine whether the business is permitted to operate commercially. The internet has made it possible to exploit that distinction on a scale that would have been difficult to imagine when the legislation was introduced. An operator can sell entries across the country without shops, physical distribution networks or many of the overheads associated with traditional lotteries. Being online doesn’t itself provide an exemption from gambling legislation, but it makes the business model considerably easier to scale.
What does the government think?
The government is well aware of the issue. The research commissioned by DCMS examined the size of the industry, the potential harm to consumers and possible regulatory interventions. It identified concerns about transparency, spending controls and the treatment of people who might be vulnerable to gambling-related harm. The findings also suggested that some operators were considerably less diligent than others about explaining their competitions and providing consumer protections.
In response, the government introduced a voluntary code of good practice for prize-draw operators. The code covers matters including age verification, spending limits, credit-card payments, complaints procedures and clearer information for customers. But the important word is voluntary. Unlike businesses regulated by the Gambling Commission, commercial prize-draw operators are not generally required to obtain a gambling licence simply because they sell entries to competitions with compliant free-entry routes.
The government has made clear that it may consider legislation if voluntary measures prove insufficient, creating significant uncertainty for the industry. If operators were required to provide genuinely convenient online free entry, their revenues might suffer. If they became subject to gambling-style regulation, their costs could increase. If restrictions were imposed on advertising, spending or the size of prizes, some competitions might become less profitable. None of these changes would necessarily destroy the industry. Larger operators might adapt, and some businesses might find alternative ways of operating, but it seems entirely possible that the extraordinary proliferation of online prize draws has been encouraged by a regulatory environment that may not last.
Enter HMRC
While the government has been considering whether online prize draws should be more closely regulated, HMRC has been pursuing a rather different question. Should the money people spend entering these competitions be subject to VAT?
Last Friday, 16 October, the First-tier Tax Tribunal heard an appeal brought by Omaze, the company behind some of Britain’s best-known luxury house competitions. Omaze is challenging HMRC’s position that paid entries to its competitions should be subject to VAT at the standard rate of 20%. The company says it has been paying VAT in Britain since 2021, so this isn’t a case of a business suddenly discovering that it has an enormous unpaid tax bill. Instead, it is a dispute about whether VAT should be charged on these transactions at all.
There is a rather massive contradiction at the heart of the argument. For the purposes of gambling regulation, Omaze operates prize draws rather than lotteries. The availability of a free-entry route is central to that distinction. But for VAT purposes, Omaze is challenging a tax treatment that distinguishes its competitions from VAT-exempt lotteries. In other words, the same legal distinction that helps these businesses operate outside the lottery licensing regime prevents them from benefiting from the VAT exemption available to lotteries.
The definition of a lottery for VAT purposes does not necessarily have to be identical to the definition used in gambling legislation. The tribunal must consider the relevant tax legislation and decide whether the exemption applies. Omaze argues that the existing approach creates an uneven playing field. The company says it has been required to pay VAT on its sales while some other operators have not, despite operating in the same market. HMRC maintains that prize draws offering both paid and free-entry routes do not qualify for the lottery VAT exemption, and that paid entries are subject to VAT at the standard rate. The tribunal’s decision is expected next spring, but the financial implications could be substantial.
The cost of VAT
Let’s return to my hypothetical camper-van competition. I sell 50,000 entries at £5 each, generating £250,000. The camper van costs £100,000, advertising costs £60,000, and administration and other expenses account for another £20,000. Before considering VAT, that leaves me with £70,000.
Now suppose the £250,000 collected from customers is subject to VAT at 20%. Because the £5 entry price already includes VAT, the amount due isn’t £50,000. It’s £41,667, representing one-sixth of the money collected. If I couldn’t recover any VAT on my costs, my £70,000 surplus would fall to just £28,333. In practice, a VAT-registered operator would normally be able to recover VAT on eligible business purchases, so the effect would depend on its particular costs. But the example illustrates how significantly VAT can affect profitability.
Of course, I could increase my ticket prices to recover the additional cost, but that might make the competition less attractive and reduce the number of entries sold. Alternatively, I could reduce the value of the prizes or spend less on advertising. Neither is particularly appealing when hundreds of other operators are competing for the same customers.
And this is why the Omaze dispute matters. The company generated nearly £240 million in revenue last year, but its pre-tax profit was less than £13 million. VAT is already reflected in its reported financial performance, but the figures demonstrate the importance of tax treatment to a business operating on relatively modest margins. If Omaze succeeds in its appeal, it could benefit financially from a different VAT treatment. Other operators might also seek to establish whether the same treatment applied to their businesses. If HMRC’s interpretation is upheld, operators that have not been accounting for VAT on paid entries may need to examine their own positions, including any potential historic liabilities.
The industry therefore faces two separate sources of uncertainty. One concerns whether its competitions should continue to operate outside gambling regulation. The other concerns how the revenue from those competitions should be taxed. Either could alter the economics substantially.
The economics of a loophole
What interests me most about this industry isn’t whether people should be allowed to spend a few pounds trying to win a house or a camper van. People spend money on all sorts of things that offer little prospect of a financial return. I certainly don’t expect to recover the £20 I’ve spent over the last few weeks, although I wouldn’t complain if someone delivered a camper van to my door.
The more interesting issue is how legislation can create an entire commercial market. The Gambling Act was designed to distinguish lotteries from genuine competitions and free draws, but the internet has enabled businesses to turn that distinction into a highly scalable commercial model. The result is an industry generating more than a billion pounds a year, and possibly considerably more, in which the great majority of entries are paid, even though the availability of free entry is central to the legal status of many competitions. And the government’s own research suggests that making free entry more convenient could threaten the business model.
There is a certain irony in that. The operators aren’t necessarily doing anything unlawful. Many are simply organising their businesses around the rules as they exist, but the commercial success of the industry may depend partly on a legal distinction that looks increasingly difficult to justify on economic grounds. There is an additional irony in the VAT dispute. For gambling regulation, the distinction between lotteries and prize draws allows these businesses to operate commercially. For VAT, that same distinction may deprive them of a valuable tax exemption. An advantage under one regulatory system becomes a disadvantage under another.
We’ve seen similar developments in other industries. New technology creates opportunities that existing legislation never anticipated. Businesses grow rapidly by operating outside the regulatory framework applying to established competitors. Eventually, governments notice and begin to reconsider the rules. Sometimes the new businesses survive and become part of the established market. Sometimes regulation changes their economics so fundamentally that the original business model disappears.
Online prize draws may be approaching that point. The government is considering whether stronger regulation is needed, HMRC is defending its interpretation of the industry’s VAT treatment, and the evidence suggests that making free entry genuinely attractive could have a substantial effect on revenue. For now, the competitions continue, and millions of people are paying for the possibility of winning houses, cars and other expensive prizes.
As for me, I’ve spent £20 and won nothing. But I’ve learned rather more about the economics of online lotteries than I expected. And if I do eventually win that camper van, I promise not to complain about the business model.
https://www.ft.com/content/72686908-c975-4a88-9f57-91f750053dac
https://committees.parliament.uk/writtenevidence/122563/pdf