Cookies on the Gambling Commission website

The Gambling Commission website uses cookies to make the site work better for you. Some of these cookies are essential to how the site functions and others are optional. Optional cookies help us remember your settings, measure your use of the site and personalise how we communicate with you. Any data collected is anonymised and we do not set optional cookies unless you consent.

Set cookie preferences

You've accepted all cookies. You can change your cookie settings at any time.

Skip to main content


Fourth National Lottery Licence: Regulatory Handbook

The Commission’s regulatory handbook sets out our regulatory approach to the National Lottery.

  1. Contents
  2. Volume two: Monitoring Performance Framework
  3. 19. Schedule 5: Good Causes Contribution

19. Schedule 5: Good Causes Contribution

19.1 This section provides guidance in relation to Schedule 5 of the Fourth Licence (the Incentive Mechanism), which sets out the calculations that define the payments the Licensee will need to make to Good Causes, via the National Lottery Distribution Fund (NLDF). This is consistent with the related obligation set out in Condition 15.

19.2 The calculation of payments to the NLDF is determined, in part, by revenue and cost figures reported by the Licensee. For certain aspects of the calculations we have a role in making determinations of values that may affect the calculation of payments to Good Causes.

19.3 This section provides further guidance on:

  • Lottery Duty and VAT adjustment
  • treatment of income and costs from Related Party Arrangements
  • Wasteful Costs
  • Promotional Prizes.

Lottery Duty and VAT adjustment

19.4 Schedule 5 of the Fourth Licence includes provision for adjustments to address potential changes in Lottery Duty and/or potential changes in VAT arrangements during the Fourth Licence. The adjustments are intended to ensure appropriate and accurate calculation of the Good Causes Contribution, and to mitigate the impacts on the Licensee from potential changes in Lottery Duty and/or changes in VAT arrangements.

19.5 The effect of any proposed adjustment will be demonstrated by the Licensee having applied the relevant formula and definitions as set out in the Fourth Licence. The Licensee is required, as part of its Estimation Methodology, to include in its estimates the impact of the Payment Adjustment.

19.6 The Reconciliation process, as set out in Schedule 5, Part C, will take into account any Lottery Duty and/or VAT adjustment(s) put forward by the Licensee.

19.7 Note that, as set out in Schedule 1 of the Fourth Licence, Lottery Duty and VAT on ticket sales (if any) are deducted from income in order to calculate Licensee Revenue for the purposes of the Good Causes Contribution calculation. For the avoidance of doubt, Lottery Duty therefore will not be included as part of Licensee Costs in order to avoid double counting.

19.8 Schedule 5, Part C sets out the treatment of Related Party revenue and costs. The broad approach to the treatment of Related Party Arrangements for the purposes of the Fourth Licence is as follows:

  • the Licensee is required to report on Related Party Revenue and Related Party Costs in line with the Fourth Licence definitions and any further necessary clarifications in our Assurance and Regulatory Reporting Requirements (see volume three)
  • we acknowledge it is possible the revenues and costs associated with Related Party Arrangements reported by the Licensee for the purposes of the Fourth Licence are different to those reported, or applied, in its statutory accounts (for example, definitions used for the purposes of the Fourth Licence may diverge from those used in preparing statutory accounts)
  • we require the Licensee to provide sufficient information to demonstrate the revenue and costs reported for Related Party Arrangements provide Good Value for Good Causes, as set out in our Assurance and Regulatory Reporting Requirements (see volume three). We expect the Licensee to consider its ability to demonstrate this when entering into a Related Party Arrangement and considering alternatives such as contracting with an independent third party or in house provision; and
  • if we are not satisfied the Licensee has demonstrated the requirements on Good Value for Good Causes, we may substitute our own determination of values (representing Good Value for Good Causes) an adjustment to apply to the Related Party revenues or costs used in the calculation of the liability to the NLDF for a particular Licence Year, as set out in Schedule 5, Part C of the Fourth Licence.

19.9 We provide below a high-level indication of some of the factors we anticipate will be relevant in assessing whether Related Party Arrangements provide Good Value for Good Causes, and that the Licensee would be required to provide to us. For example, this may include:

  • market prices for other products or services
  • evidence on prices offered as part of competitive tender exercises for similar types of arrangement
  • information on the costs incurred by a Related Party
  • information on the costs incurred by the Licensee.

19.10 Where the Licensee intends to support its submissions with information on costs incurred, we also expect to see information on any profit or margin (to the Related Party) in excess of the costs incurred.

19.11 As a default approach, we expect to make an assessment of Related Party Arrangements after the Licensee reports its relevant costs and revenues to us, as per our Assurance and Regulatory Reporting Requirements (see volume three), through the Reconciliation process set out in Schedule 5, Part C of the Fourth Licence.

Wasteful Costs

19.12 Schedule 5, Part C sets out the treatment of Wasteful Costs. It is conceivable that, despite the financial incentives for efficiency in respect of its cost and operations, the Licensee could still incur wasteful expenditure. In this context, there is a residual risk that any Wasteful Costs incurred by the Licensee act to the detriment of Good Causes. We address this risk through the calculations which implement the Incentive Mechanism and determine the Licensee’s liability to Good Causes.

19.13 Table 3 in Appendix 1 to Schedule 5 of the Fourth Licence defines Wasteful Costs and specifies they are Excluded Costs; these are costs excluded from the calculation of the Surplus. As such, these costs are borne by the Licensee and not shared with Good Causes. We provide some high-level guidance on how we expect to approach such a determination below.

19.14 Our default position is that we presume costs incurred by the Licensee, which are not excluded costs, are efficient (and reasonable to share with Good Causes), unless and until we determine they are Wasteful Costs according to the definition given in the Fourth Licence.

19.15 For the avoidance of doubt, Wasteful Costs could include costs incurred in relation to activities carried out by the Licensee directly, as well as amounts paid to Lottery Subcontractors. We note that other requirements in the Fourth Licence should also serve to mitigate the risk of incurring Wasteful Costs, for example Condition 21.4 which requires the Licensee to follow Best Practice in relation to certain aspects of subcontracting.

19.16 In terms of the substance of our assessment of Wasteful Costs, we provide an indication of the approach and factors that we anticipate will be relevant:

  • we intend the Fourth Licence measures around Wasteful Costs to act as a safeguard, not something we expect to be used routinely
  • our assessment of Wasteful Costs will likely involve examination of specific costs, or specific categories of costs, to identify where waste may have occurred
  • we expect to take account of the view that even a well-run and reasonably efficient company may, from time to time, incur certain costs that could have been avoided or reduced, but that such companies would have arrangements in place to limit the materiality and incidence of any such instances
  • we expect our assessment to take account of both the extent to which we might consider specific costs incurred by the Licensee to be wasteful in their own right, and of the Licensee’s governance arrangements, internal processes and decision-making for any costs we suspect of being wasteful
  • as set out in Appendix 1 to Schedule 5 of the Fourth Licence, Wasteful Costs are those costs which we are satisfied would not have been incurred by the Licensee if it had acted as a reasonably efficient operator on the basis of information reasonably available at the time the cost was incurred. As such, this does not extend to costs that can only be perceived as inefficient of wasteful with the benefit of hindsight
  • we recognise there will tend to be uncertainty about the success of activities such as marketing and research and development, and we do not seek to penalise the Licensee for initiatives reasonably expected to be worthwhile at the time they were carried out.

19.17 In determining whether Licensee costs are Wasteful Costs, we provide an indication of the approach and factors that we anticipate may be relevant in our assessment:

  • it is at our discretion, as part of the Reconciliation set out in Schedule 5, whether we undertake an assessment to determine whether any Licensee costs are Wasteful Costs
  • any assessment we make about Wasteful Costs will involve a review of information on costs reported by the Licensee as part of the Assurance and Regulatory Reporting Requirements and requests for further information from the Licensee
  • if required, our assessment of Wasteful Costs may involve other evidence, potentially including evidence from external experts
  • the Licensee will have an opportunity to provide assurance information in relation to whether certain costs are Wasteful Costs
  • we will first undertake an initial stage where we first consider whether it could be proportionate for us to investigate the Wasteful Costs in question. We will only proceed with an investigation if we conclude it is proportionate for us to do so
  • we will endeavour to notify the Licensee (and potentially other stakeholders) in advance that we are considering making a determination that the Licensee has incurred Wasteful Costs as part of the reconciliation process. This process will be carried out in line with our Corporate Governance Framework and decision-making responsibilities for the Fourth Licence
  • we will publish a decision, redacted as necessary, on any determination of Wasteful Costs which includes our reasoning. Apart from notifying the Licensee of the incidence and scale of any Wasteful Costs, the publication will also provide information to help the Licensee, and potential future Licensees, better understand our approach to considering Wasteful Costs within the context of the calculations in Schedule 5, Part B
  • we envisage that any determination on Wasteful Costs would be undertaken as part of, and within the timeframes set out in, the reconciliation process in Schedule 5, Part C of the Fourth Licence. However, there may be instances where we will require additional time to investigate and make a reasoned decision on any Wasteful Costs. We may therefore have to notify the Licensee in a financial year subsequent to that in which the relevant costs are incurred. Given the biannual cost expenditure reporting requirements, we envisage that this would be in exceptional circumstances only, however this is dependent upon events in the course of the Fourth Licence period. For the purposes of the calculation required under Schedule 5, Part A, the effect is to change the Licensee’s liability to good causes in respect of a previous financial year. This will, in turn, affect the Licensee’s annual reconciliation calculations and may require an adjustment to the Actual Annual Amount for a prior Licence Year, as set out in Schedule 5, Part C, 5.14
  • in estimating its weekly payments to good causes, and in carrying out its annual reconciliation of payments made to good causes, the Licensee will take appropriate account of any notification from us about of Wasteful Costs
  • we will endeavour to avoid any undue delays in the process of our assessment.

Promotional Prizes

19.18 The Licence provisions on Promotional Prizes relate to Direction 9(g) of the Directions issued to the Commission by the Secretary of State in accordance with Section 11 of the Act.

19.19 Schedule 5, Part B, section 10 sets out the conditions under which any amount paid by way of Promotional Prizes shall be either an Excluded Cost or an Allowable Promotional Prize Cost. When assessing whether to provide consent to such amounts being treated as Allowable Promotional Prize Costs, the Commission will take account of its statutory duties and public law principles. The assessment will depend on the circumstances of any specific case.

19.20 The Licensee may include in the Funds Protection Policies, with the prior approval of the Commission, a policy for the application of Prize Rounding Amounts from any Game in line with requirements of Condition 16.13.

19.21 Promotional Prizes are defined in Condition 8.23. As per Condition 8.22, the onus is on the Licensee to define the methodology that will identify Promotional Prizes in accordance with this definition. This methodology should be included in Section 6 Licence applications where applicable.

19.22 Condition 8.23 draws a distinction between Promotional Prizes and ‘Prizes available in the ordinary course of operating that Game’. The Commission expects that Prizes are likely to be considered as being available in the ordinary course of operating a Game when such Prizes are awarded routinely and are funded from the prize payout percentage in the game design in accordance with the Section 6 Licence that the Game is promoted under. This might include, for example, Prizes associated with periodically boosted jackpots or must-be-won conditions that are funded from reserves formed of previous proceeds from that Game’s sales. For the avoidance of doubt, it will be for the Licensee to consider whether any of its planned activities constitute a Promotional Prize, and there is no requirement under the Section 5 Licence for the Licensee to offer Promotional Prizes.

Previous section
18. Condition 28: Outstanding Liability Fund
Next section
20. Section 6 Licences
Is this page useful?
Back to top