VBANDG17500 - Lotteries: lottery law
European law
Exemption for lotteries was specifically provided for by Article 135(1)(i) of the Principal VAT Directive which applied to the UK up to when the UK left the EU. It reads:
(i) betting, lotteries and other forms of gambling, subject to conditions and limitations laid down by each Member State;
UK law
Schedule 9, Group 4, Item 2 of the VAT Act 1994 provides for exemption for:
The granting of a right to take part in a lottery.
The exemption essentially covers the sale of the lottery tickets to the public, as these acknowledge that a right to participate has been granted to the participants.