Have you ever wondered why daytime television competitions claim that their prizes are tax free?
Unlike many other countries, the UK is quite unique in the sense that HMRC allows cash prizes from competitions and the National Lottery to be completely free of income tax.
However, in order for such a prize from a ‘competition’ not to be classed as an illegal form of lottery, there has to either be a skill-based element to the entry, such as a question, or alternatively the option of free entry, usually via postal entries.
You will undoubtedly recall seeing competitions that required an answer from a multiple choice question, whereby even a 5 year old child would have been able to answer correctly. This was often a way of trying to get around the requirement for providing a free entry option as the organiser would claim that there was a skill element. The Gambling Act 2005 clarified the position by confirming that the skill based question had to ensure that there was a reasonable expectation that a significant proportion of potential participants would be deterred from entering.
The Gambling Commission have refused to give further clarity on what this reasonable expectation would constitute, but did comment that the entire definition had to be read in the context of “its ordinary, natural meaning”.
After all, if HMRC started taking too much of a heavy-handed approach to the taxation of winnings, they would also be expected to make allowances for losses incurred of pursuit of the winnings and that would probably be counter-productive for them!