“Senior sources” told the paper that the move was “under review”.
It could knock 20 per cent off the price of a test, which currently costs from £60 to £300 when administered privately.
Many countries require travellers to submit a negative result from a coronavirus PCR test taken within a certain time frame before travel in order to gain entry.
Meanwhile, the UK government has said that, once international leisure travel is legal again – likely to be from 17 May – arrivals will also be required to undertake at least one PCR test.
A traffic-light system will be used, branding countries red, amber or green depending on their level of risk, with different restrictions applying to each category.
However, even those entering England from “green” countries, which present the lowest risk, will have to purchase a PCR test to be taken on the day of arrival (day zero), the day after or on day two.
Cutting VAT could therefore help lower the cost of foreign holidays this summer quite significantly, representing a saving of £40-£240 for a family of four travelling back from a green country.
The EU has recommended that member states exempt tests from VAT, an approach that most countries have adopted.
PCR tests in Europe are far cheaper than the UK, with the average price coming in at £62 compared to £130.
“Exempting the tests from VAT is being seriously considered,” a government source told The Telegraph.
“The main concerns are that test providers pass on the saving to travellers and whether it will set a precedent for removing the charge in other areas of the economy.”
A Treasury spokesperson told The Independent: “We don’t comment on speculation about tax changes.”