Zero VAT - a prescription for healthcare, social care & education

In the report “High VAT Rates and Exemptions for Welfare Services – A Toxic Cocktail”, we propose changes and improvements aimed at creating a simpler, more transparent and more logical VAT framework that supports the development of welfare services.

Our proposal is that welfare services should be subject to VAT, with the possibility of applying a zero or reduced VAT rate. This would allow VAT deductions on costs and investments and make it easier to lease premises. The impact on public finances is estimated at approximately SEK 2 billion if welfare services are subject to VAT at a zero rate. If the reform is supplemented with output VAT on fees, it can be neutral for public finances or even strengthen them, depending on the tax rate in the final design.

Today, healthcare, education and social care are exempt from VAT. Such exemptions are often described as “VAT-free”, but VAT-free does not mean free from VAT. Companies carrying out VAT-exempt transactions have no right to deduct VAT on their costs. As a result, purchases of IT systems, robotics, AI, technical equipment, staffing, adaptations of premises, operations, maintenance and other inputs become 25 percent more expensive. This VAT burden particularly affects vocational education and investments in innovation-driven health and social care.

The original purpose of VAT exemptions was to provide an advantage, reduce costs and increase accessibility for citizens. However, as VAT rates have risen, the number of transactions has increased, more actors have entered the sector, and investment needs have grown, these exemptions have instead become a disadvantage. Rather than reducing costs and improving accessibility, they now increase costs and reduce accessibility for citizens.

Municipalities and regions are covered by a VAT compensation scheme designed to ensure that VAT effects do not favour the option of carrying out transactions in-house. The scope of this compensation system is approximately SEK 100 billion (EUR 9 billion) per year, compared with total VAT revenues of around SEK 600 billion (EUR 55 billion), based on estimates for 2026. The underlying principle is that the municipal sector collectively carries the cost of the compensation system through adjusted central government grants.

The compensation system has served Sweden well, but over the years it has faced growing criticism. Concerns relate to its complexity, its standardised design, which leads to over- and under-compensation, a lack of transparency that creates practical and financial problems in public procurement, and municipal tax planning. We argue that it is time to address these challenges, especially now that work is under way within the EU to modernise the EU VAT Directive.

Today’s VAT rules are outdated, complex and costly. They also work against transactions and the development of welfare services. Some parts of our proposals concern changes that need to be made to the EU VAT Directive and have been recommended by the EU VAT Expert Group in the report requested by the European Commission in 2024. Several Swedish VAT rules also need to be reviewed. Areas that could be addressed immediately include, for example, cars, permanent residential accommodation, cost-sharing groups, VAT-grouping, option to tax immovable property, transfers of going concern and more.

Sweden needs a range of VAT reforms to safeguard growth and competitiveness. Not least, it needs a VAT reform for the welfare sector, rather than continuing to patch and repair the system indefinitely. The way forward is not further adjustments, but a simple and neutral system that can be understood and applied in practice. Let this report mark the beginning of a long-awaited and much-needed discussion – and, above all, concrete action to achieve that goal.

Authors: Anna Sandberg Nilsson, VAT expert, Oscar Brissle, Economist