Category: VAT

In a recent case in Glasgow, two restaurant owners were found guilty of carrying out nearly a £700,000 VAT fraud scheme. This shocking case highlights the importance of maintaining proper financial records and adhering to VAT regulations.

The Glasgow Restaurant VAT Fraud Case

Two Glasgow restaurateurs were jailed after pleading guilty to large-scale VAT fraud. Antonio Carbajosa (41) and Kevin Campbell (44), involved in the Glasgow Restaurant VAT Fraud Case, ran several Glasgow venues — including Cranside Kitchen, Pickled Ginger, and Halloumi. They admitted fraudulently evading VAT for £682,882 between November 2011 and October 2016.

Their accountant, Khalid Javid (67), also pleaded guilty to submitting false VAT returns on their behalf. 

How Was the £700k VAT Fraud Scheme Exposed

Both owners suppressed their true sales figures and under-declared their takings. This meant their businesses kept cash that should have gone to HMRC as VAT.

HMRC investigators spotted unexplained discrepancies in the VAT returns. An inquiry called Operation Keyholder followed, with forensic accountants examining accounts from 2012 to 2016. The probe confirmed a total VAT shortfall of £682,882.

Three of their companies were never registered for VAT at all — despite having annual turnovers well above the registration threshold.

The two restaurateurs admitted they and their accountant “acted together in a co-ordinated way” to cheat the VAT system. By hiding sales, the businesses appeared smaller. As the prosecutor noted, the companies could pay bills and draw higher wages because they were pocketing VAT that should have gone to HMRC.

Recent VAT Cases in UK:

• Shop Owner Pleads Guilty to Duty and VAT Fraud in South Belfast
• Everything About HMRC v Colchester Institute VAT Dispute
• Pre-registration VAT Recovery in UK Clarified by Tribunal Ruling – What it Means for Businesses
• UK VAT On Prize Draws Faces Scrutiny As HMRC Clarifies Tax Position

How VAT for Restaurants Work

• Food and drink consumed on the premises is always standard-rated at 20% VAT
• Service charges and paid tips on top of meals are also subject to VAT
• Hot takeaway food is usually standard-rated.
• Cold takeaways and most plain foods are zero-rated or exempt
• The VAT registration threshold (since April 2024) is £90,000 of taxable turnover

Any business expecting to exceed that in a 12-month period must register and start charging VAT. Businesses must also:

• Issue proper VAT invoices
• Keep till receipts and bank statements
• Pay all VAT collected to HMRC
• Retain all records for at least 6 years

Consequences of VAT Fraud

Under Section 72 of the Value Added Tax Act 1994, fraudulently evading VAT can lead to:

• Up to 7 years in prison
• Unlimited fines
• Confiscation (POCA) orders to seize illicit gains
• Criminal records and business bans
• Reputational damage

Penalties are not limited to business owners. Corporate officers and accountants can also be prosecuted — as this case shows with Mr Javid.

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How HMRC Catches VAT Fraud

HMRC uses automated data-matching and analytics to flag anomalies. In this case, HMRC noticed discrepancies in the VAT returns of two of the businesses, which triggered Operation Keyholder.

Common red flags include:

• Missing till records
• Undeclared cash sales
• Invoices that don’t add up

HMRC cross-checks VAT returns against bank deposits, industry benchmarks, and supplier statements.

How We Help Restaurants Manage VAT and Stay Compliant

At Apex Accountants we help businesses navigate VAT rules and handle HMRC enquiries. Our services include:

• VAT compliance reviews: We review your sales and records to ensure returns are correct and complete
• VAT registration & planning: We advise on when and how to register, and on available VAT schemes for hospitality businesses
• Support during HMRC investigations: Our experts guide you through meetings, help prepare responses, and liaise on your behalf
• Forensic accounting & recovery planning: In serious cases, we reconstruct finances to clarify tax liabilities and protect your interests

Proper guidance can significantly impact the outcome of an investigation, ensuring a smooth process rather than a costly one.

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FAQs About VAT For Restaurants

Is all restaurant food subject to VAT? 

Generally yes. Food eaten on-site is standard-rated at 20%. Some cold takeaway food may be zero-rated, but on-premises meals and drinks are a clear-cut VAT case.

What if I forget to register for VAT? 

HMRC can backdate the VAT liability. You may owe unpaid VAT, penalties of up to 100% of the amount owed, and interest. Voluntary early disclosure usually reduces penalties; hiding it can lead to criminal investigation.

Can I get in trouble for honest mistakes? 

HMRC understands errors happen. Genuine mistakes may attract lower penalties. But deliberate under-reporting or falsifying returns is treated as fraud. Even reckless inaccuracies carry serious consequences.

Do I have to repay VAT after conviction? 

HMRC usually tries to recover unpaid VAT through court orders. Businesses should assume they will be held responsible for all unpaid tax.

How can I avoid VAT penalties?

• Register for VAT when required
• Charge the correct VAT rates on each sale
• Keep all invoices, receipts and till rolls
• File accurate VAT returns and pay on time
• Get professional advice quickly if HMRC contacts you

The UK government has confirmed that paid entries to online VAT on prize draws offering both a free and paid route will be subject to value added tax (VAT) at the standard rate, challenging the widespread assumption that such draws fall within the betting and gaming exemption. Responding to a House of Commons question tabled on 9 February, Treasury minister Dan Tomlinson stated on 17 February that HM Revenue & Customs (HMRC) “confirm that prize draws offering both paid and free entry routes are not eligible for VAT exemption and paid entries will be subject to VAT at the standard rate of 20%”. The clarification comes as the Department for Culture, Media & Sport (DCMS) prepares to implement a voluntary code of practice for prize draw operators and as the sector attracts increased regulatory and fiscal scrutiny.

Why VAT on online prize draws matters

Prize draws have become a lucrative segment of the UK online promotions market, and VAT on online prize draws is increasingly under scrutiny. Independent research commissioned by DCMS estimated that around 7.4 million adults took part in prize draws and competitions (known collectively as PDCs) in the 12 months to November 2023, spending around £1.3 billion—with a market size range of £700 million to £2.1 billion. The sector is dominated by around 400 operators and is growing rapidly, prompting concerns about consumer protection, gambling harm and tax compliance. The Treasury’s recent statement, coupled with the forthcoming voluntary code, means operators must reassess whether their ticket sales attract VAT and consider potential historic exposures.

Key points

• HMRC confirmation: The government has confirmed that prize draws with both paid and free entry routes are not covered by the VAT exemption for betting, gaming, and lotteries; VAT for online prize draw operators will apply at 20% for paid entries.
  
• Policy trigger: The clarification followed a parliamentary question about the tax treatment of such draws, asked amid the roll‑out of the voluntary code of practice.
  
• Growing market: Research shows 7.4 million participants and annual spending around £1.3 billion, with at least 401 operators, each of whom must understand VAT for online prize draw operators to avoid penalties. 
• Exemption complexities: VAT legislation exempts facilities for betting or playing games of chance, but the supply of games of skill is standard‑rated. The classification of prize draws sits in this grey area.
  
• Voluntary code: Operators signing the code must implement its player‑protection measures within six months and no later than 20 May 2026.
  
• Uncertain tax treatment: Larger businesses taking a tax position inconsistent with HMRC’s “known position” must notify HMRC under the uncertain tax treatment regime.
  

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What Has Happened with VAT on Prize Draws

A written question from Maureen Burke, Labour MP for Glasgow North East, asked the Chancellor to clarify the VAT treatment of ticket sales for online prize draws that offer both a paid and a free entry route. In the response on 17 February 2026, Treasury minister Dan Tomlinson confirmed that HMRC regards paid entries as standard‑rated supplies, meaning VAT must be charged at 20 %. The minister’s statement effectively rejects the view that such draws are exempt under Group 4 of Schedule 9 to the Value Added Tax Act 1994, which exempts facilities for betting, gaming and lotteries.

The parliamentary question reflects growing uncertainty in the sector. Many operators have treated their prize draws as VAT‑exempt on the basis that they provide a game of chance similar to a lottery. HMRC’s position draws a distinction between games of chance, which are exempt, and games of skill or commercial competitions, which are standard‑rated. The government’s clarification suggests that a dual‑entry prize draw—where free postal entries coexist with paid online tickets—does not fit neatly within the gambling exemption.

Background and context

Under existing HMRC guidance, supplying facilities for betting or playing games of chance is normally exempt from VAT. A game of chance involves an outcome determined wholly or partly by chance, whereas games of skill, such as certain competitions are subject to VAT. HMRC’s VAT notice cites “spot the ball” competitions as examples; these were deemed games of chance and thus exempt after a Court of Appeal ruling in 2016. The line between skill and chance, however, is nuanced. In prize draws offering both free and paid entry, HMRC appears to consider the paid ticket sale as a taxable supply rather than a stake in a game of chance.

The value of the exemption may be substantial. Participation in games of equal chance became VAT‑exempt from 29 April 2009, and the exemption covers stakes or takings less any winnings. Operators who have not accounted for VAT on ticket sales may face assessments, penalties and interest. Moreover, under the uncertain tax treatment (UTT) regime, large businesses must notify HMRC when they take a tax position that is uncertain and exceeds a £5 million tax advantage. Treating prize draw entries as exempt despite HMRC’s stated position would therefore trigger a disclosure obligation.

Key details or changes

The voluntary code of good practice for prize draw operators, published by DCMS and updated in February 2026, contains detailed measures on player protection, transparency and accountability. Signatories must fully implement the code within six months of publication and no later than 20 May 2026, sharing best practices and supporting non‑signatories. The code prohibits operators from accepting credit card payments above £250 per month per player, requires age verification and clear complaints processes, and encourages spend limits and self‑exclusion options. While the code does not address VAT directly, it signals heightened regulatory interest in the sector.

The research commissioned by DCMS highlights the scale of the market and its proximity to gambling. An estimated 88 % of prize draw participants also engage in commercial gambling activities, compared with 60 % of adults in the general population. This connection has raised concerns that prize draws may serve as a gateway to gambling, prompting calls for tighter oversight and clearer taxation rules.

Who is affected

• Online prize draw operators offering paid and free entry routes are directly affected. Those who have treated entry fees as exempt may face liabilities for under‑declared VAT and should review historic transactions.
  
• Businesses using prize draws for promotions, such as retailers and charities, need to consider whether entry fees constitute taxable supplies. Promotional competitions based solely on skill may remain subject to VAT; free-entry draws with no paid option are outside the scope.
  
• Large corporations are subject to the uncertain tax treatment rules. If their interpretation diverges from HMRC’s position, they must disclose the uncertainty.
  
• Players and consumers are unlikely to see direct tax impacts, but operators may adjust ticket prices or limit paid entries to account for VAT.
  

Expert Analysis 

From a tax and accounting perspective, HMRC’s confirmation narrows the scope of the betting and gaming exemption. The key determinant is whether the consideration paid by participants is a stake in a game of chance (exempt) or payment for a right to enter a competition or prize promotion (taxable). Operators offering both free and paid entry routes effectively sell a participation right. HMRC’s position aligns with the principle that a competition with a free route is not a “bet” and therefore falls outside the Group 4 exemption.

Businesses that have relied on the exemption should assess their exposure. This includes analysing whether entry fees were treated as exempt and whether input VAT recovery on related expenses (such as prizes or marketing) was restricted. Where VAT was not charged, operators may need to correct past VAT returns and negotiate time‑to‑pay arrangements with HMRC. The UTT regime adds a further layer: taking a position contrary to HMRC’s known stance—such as claiming exemption after February 2026—must be disclosed if the potential tax difference exceeds £5 million.

Why this matters for UK businesses

For operators, the immediate impact of VAT treatment for promotional competitions is financial. Charging 20 % VAT on ticket sales could significantly reduce margins and may require price adjustments or reductions in charitable donations. Businesses that fail to account for VAT risk assessments, penalties and reputational damage. Those using prize draws as marketing tools must also be aware that VAT applies where participants pay to enter; free draws with no purchase requirement remain outside the scope. Compliance obligations extend beyond VAT; operators must implement the voluntary code’s player‑protection measures by May 2026.

The clarification also underscores the need for robust tax governance. Uncertain tax positions should be documented, and businesses should engage early with HMRC to seek confirmation or apply for rulings. Transparent communication reduces the likelihood of costly disputes. In the longer term, litigation may test whether the dual-entry draw model genuinely falls outside the betting exemption, echoing the successful “spot the ball” challenge. Until courts provide further guidance, conservative treatment and disclosure will be prudent.

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VAT Treatment for Promotional Competitions: What Businesses Should Do

• Review current and historic prize draw models to determine whether entry fees have been correctly treated for VAT purposes and identify any under‑declared VAT.
  
• Distinguish between games of chance and games of skill. Where an element of skill predominates, treat the supply as taxable; where it is pure chance with a stake, exemption may apply.
  
• Implement the DCMS voluntary code by 20 May 2026, including spend limits, age verification and restrictions on credit card payments.
  
• Assess uncertain tax treatments and notify HMRC if the tax advantage exceeds the £5 million threshold, particularly if adopting a position contrary to HMRC’s statement.
  
• Seek professional advice before launching prize promotions to ensure VAT compliance and mitigate potential liabilities.
  

How Apex Accountants Can Support Your Business with VAT on Prize Draws and Competitions

At Apex Accountants & Tax Advisors, we offer expert guidance on VAT and indirect taxes related to prize draws and promotional competitions. Our services include:

• VAT Reviews: Assessing your prize draw and competition models to ensure they align with the latest VAT regulations.
• Exemption Analysis: Determining whether VAT exemptions apply and evaluating any potential historic VAT exposure.
• VAT Registration & Return Adjustments: Supporting VAT registration, filing adjustments, and handling negotiations with HMRC.
• Voluntary Code Compliance: Assisting with the implementation of the voluntary code, including age verification and spend limits compliance.
• Uncertain Tax Treatment Notifications: Offering expert advice on uncertain tax treatment and helping you prepare necessary documentation.

Contact us now to ensure your business remains VAT-compliant with the latest regulations.

Conclusion

The UK government’s confirmation that paid entries to prize draws are subject to standard‑rated VAT signals a shift in the treatment of a rapidly growing sector. With millions of participants and significant sums at stake, prize draw operators must reassess their tax positions and prepare for increased compliance obligations. The forthcoming voluntary code aims to improve consumer protections, and the uncertain tax treatment regime encourages transparency. Businesses that take proactive steps to review their prize promotions, implement the code and engage with HMRC will be better positioned to manage risks and avoid costly disputes.

Frequently asked questions

Are online prize draws subject to VAT? 

Yes. HMRC has confirmed that prize draws offering both paid and free entry routes are not eligible for the betting and gaming exemption; paid entries must be charged VAT at 20 %.

What about free‑entry routes? 

Where entry is genuinely free and no payment is required, there is no taxable supply and VAT does not arise. The tax liability applies to the paid entry, not the free option.

Why are games of chance usually VAT‑exempt?

Group 4 of Schedule 9 to the Value Added Tax Act 1994 exempts the provision of facilities for betting or playing games of chance. A game of chance is defined as one where chance or chance and skill combined determine the outcome. However, competitions based principally on skill are standard‑rated.

When does the voluntary code come into force? 

Signatories must fully implement the code within six months of its publication and no later than 20 May 2026. The code is not legally binding but demonstrates good practice and may influence regulatory expectations.

What is the uncertain tax treatment regime? 

Since 1 April 2022, large businesses with turnover above £200 million or assets exceeding £2 billion must notify HMRC when they adopt a tax position that is uncertain and exceeds a £5 million tax advantage. Adopting a position contrary to HMRC’s confirmed view on prize draws could trigger this notification.

Do prizes attract VAT? 

For exempt betting and gaming supplies, the stake money is outside the scope of VAT and prizes are not taxable; only the net takings are exempt. Where a prize draw is taxable, any input VAT on goods given as prizes may be recoverable, subject to normal rules.

Could future litigation change HMRC’s position? 

Possibly. The 2016 “spot the ball” case demonstrated that courts may classify certain competitions as games of chance. If a court were to decide that dual‑entry prize draws are bets or lotteries, they could become exempt. Until then, HMRC’s stated position applies and businesses should account for VAT accordingly.

Fresh HMRC figures have reignited an old VAT debate: whether the UK’s compulsory VAT registration threshold is creating a “cliff edge” that nudges small firms to stay small. In the year to December 2025, 683,700 businesses reported turnover below the £90,000 VAT threshold, up from 671,000 a year earlier. Over the same period, the number in the £90,000 to £150,000 bracket fell to 280,400 from 306,300.

This pattern can look like “bunching” around the threshold, especially in price-sensitive, labour-heavy sectors like hospitality, personal services and trades. A recent Business and Trade Committee report also warned the VAT threshold can discourage expansion and that cliff edges penalise firms that try to grow.

Why this matters for small businesses

VAT is not just a tax rate. It is a pricing decision, a cash flow issue, and an admin commitment.

Once you register, you generally need to:

• charge VAT on most standard-rated sales (often 20%)
• file VAT returns (usually quarterly)
• keep VAT records and follow VAT rules on invoices, evidence, and adjustments

For firms selling mainly to the public (who cannot reclaim VAT), adding VAT can feel like an overnight price jump. For firms selling mainly to VAT-registered businesses, registration can be neutral or even helpful, because customers can often reclaim VAT and you can reclaim VAT on your costs.

The £90,000 VAT threshold: what the rules actually say

The VAT registration threshold increased from £85,000 to £90,000 from 1 April 2024.

The two tests that trigger VAT registration

You must register if either applies:

Key point: it is a rolling 12-month calculation, not “your year end” and not “the tax year”.

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What counts as “taxable turnover”?

HMRC focuses on taxable supplies, which generally include standard-rated, reduced-rated, and zero-rated sales. Exempt and out-of-scope income is treated differently, which is where many small businesses slip up.

Why businesses may cluster below £90,000

The incentive is simple: staying unregistered can keep pricing simpler and admin lighter. But it can also cap momentum.

Common behaviours advisers report include:

• turning away work late in the year to avoid breaching the line
• reducing hours or pausing marketing during busy periods
• delaying invoicing (which can be risky if it does not reflect the true tax point)
• changing customer mix, focusing on zero-rated or VAT-friendly work where possible
• restructuring activities into separate legal entities

That last point is the most dangerous if done mainly to sidestep VAT.

“Business splitting” and disaggregation risk

Splitting a business into multiple entities is not automatically illegal. But if it is an artificial separation, HMRC can treat the activities as a single taxable person for VAT. HMRC has detailed guidance on identifying when separate businesses are, in reality, one entity.

Practical ways to handle the VAT step-up without stalling growth

1) Price and margin planning (before you register)

• model what happens if you add VAT to prices versus absorbing part of VAT in margin
• review competitors: are they VAT-registered or not
• check whether your customers can reclaim VAT (B2B often can, consumers cannot)

2) Consider VAT schemes that help admin or cash flow

Some schemes are designed to reduce friction:

These are not right for every business, but they can ease the transition for some.

3) Improve record-keeping and invoicing controls

• keep clear evidence for VAT invoices and receipts
• set up bookkeeping so VAT codes are consistent
• avoid last-minute fixes that create errors and rework

What reforms are being discussed?

There is no consensus. The Business and Trade Committee has urged reform to address growth-discouraging cliff edges. Meanwhile, the Resolution Foundation has argued for a much lower threshold (around £30,000) to reduce distortions and raise revenue.

Others argue the opposite: raise the threshold so that only firms with more scale face compulsory registration (one proposal reported was £115,000).

A realistic outcome may involve reviewing how the cliff edge works, not just the number.

How We Help Small Businesses Navigate VAT

At Apex Accountants & Tax Advisors, we help growing businesses make VAT decisions based on numbers, not fear. Our VAT support typically covers:

• VAT threshold monitoring and registration planning
• pricing and margin reviews to reduce VAT shock
• VAT return compliance and error checks
• advice on suitable VAT schemes (where eligible)
• risk reviews around disaggregation and trading structures, aligned with HMRC guidance

If you would like guidance on managing VAT thresholds or reviewing your VAT position, contact Apex Accountants or book a consultation with our team today.

Conclusion

The latest HMRC figures and parliamentary scrutiny suggest the £90,000 threshold still shapes behaviour. For some firms, holding turnover below the line may feel safer in the short term, but it can also limit long-term value. The better approach is to treat VAT as a planned transition, with proper tracking, pricing decisions, and systems that keep compliance tight while growth continues.

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FAQs

1. Do I have to register for VAT the moment my turnover reaches £90,000?

No. You must register when your taxable turnover exceeds £90,000 over any rolling 12-month period. Once the threshold is breached, you normally have 30 days from the end of that month to notify HMRC and complete VAT registration.

2. How can I correctly track the rolling 12-month VAT threshold?

Businesses should review their total taxable sales at the end of every month. Add together turnover for the previous 12 months, not the tax year. Accounting software or spreadsheets can help monitor the threshold and avoid accidental breaches.

3. What happens if my business goes over the VAT threshold accidentally?

If your turnover exceeds £90,000 and you fail to register on time, HMRC may still require registration from the correct effective date. You may have to pay VAT owed on earlier sales and could face late registration penalties.

4. Is voluntary VAT registration ever beneficial for small businesses?

Yes, voluntary VAT registration can be beneficial in some cases. Businesses that incur significant VAT on expenses or mainly serve VAT-registered customers may benefit because they can reclaim input VAT and appear more established to larger clients.