VAT exemption for healthcare to remain as struggle to raise tax continues
There has been renewed speculation that the Chancellor may use the forthcoming November Budget to remove the VAT exemption for healthcare and charge 20% VAT – as it did for private education last year. But the questionable promise of £2 billion revenues has already evaporated with a government denial. See other Budget VAT-raising options.
At first glance, this looks attractive as the government needs to close a £20 billion+ funding gap at the November Budget: some estimate the “cost” of the exemption is £2 billion per annum. However, a closer look at the Value Added Tax Act 1994 and the practical operation of the healthcare market shows why that figure is likely overstated — and why, in certain scenarios, abolition could reduce net VAT receipts.
On 30 September, Secretary of State for Health, Wes Streeting, said the UK would not change the VAT exemption.
Scope of the healthcare VAT exemption
The exemption under VATA 1994, Sch. 9, Group 7 applies broadly to “the provision of medical care by a registered health professional.” It is not confined to private hospitals. It includes:
- Dental services
- Optical services
- Osteopathy and chiropractic
- Other regulated healthcare professionals
Accordingly, abolition would not be targeted at a small, wealthy minority (as in the education VAT debate). It would affect a very large proportion of the population who access dentists, opticians, or other primary healthcare privately.
The HMRC £2bn estimate may be overstated
Lord Kinnock recently cited HMRC’s estimate of a £2bn cost from the exemption (see HMRC’s Estimated cost of structural tax reliefs). That figure assumes the exemption is fully withdrawn, that all services are subject to VAT at 20%, and that there is no behavioural or structural response. This is highly implausible:
- Exemptions would almost certainly remain for NHS-procured services, otherwise the NHS itself faces a direct cost increase.
- There would be strong political pressure to retain the exemption for dentists, opticians and similar providers.
- Once those are excluded, the base of taxable services narrows significantly.
The Input Tax Credit Problem
The more fundamental issue lies in how private healthcare is financed. The majority of private medical treatment in the UK is funded not by individual patients but by employers, via medical insurance or “self-insured” healthcare schemes.
If the exemption were abolished, providers such as Bupa would begin charging VAT on these services. However, VAT-registered employers would recover that VAT in full as input tax. The Exchequer would gain little or nothing from this segment of the market.
Worse, providers who are currently “exempt” cannot recover their own input VAT on costs (premises, equipment, administration). Abolition would convert them into taxable businesses, giving them a full right of recovery. This could reduce the net VAT yield, particularly as more employers switch to self-insurance models to maximise recovery.
The Impact on Self-Funding Patients
Where VAT would bite is on the self-funding market: individuals paying directly for consultations, scans, or treatment. Their bills would rise by 20%, and personal medical insurance premiums would also increase (insurers, unlike employers, cannot usually reclaim VAT on claims costs). This risks deterring uptake, pushing demand back onto the NHS and raising public expenditure elsewhere.
