Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 30th September 2021

The predicament currently facing restaurant owners is a real one and unfortunately there is no champion to represent them in their quest to improve quality and raise standards. A smart solution which will lead to better operational efficiency will be a tax reform intended to achieve parity with competing Med countries.

The author suggests a smart initiative which if well structured, does lead to a level playing field. One acknowledges that part of the industry under-declare sales in an effort to meet increasing overheads and fierce competition for staff.

The problem needs to be tackled and while evasion and the shadow economy does mitigate some of the cost escalation registered in catering products (mainly food and drinks) there is a silent majority which says that it is better not to rock the boat - let sleeping dogs lie and try make hay while the sun shines. Such an attitude exacerbates the dire sustainability of the industry in the long term.

This brashness may well be anathema and if allowed to reduce quality levels in such an unbridled fashion and be left unchecked may lead to tomorrow’s deterioration of our image as a self-respecting resort.

This article explains how sustainability of catering establishments (whether it is fast food or silver service) and services at hotels can be improved by lowering vat to match the rates charged by our competitors in the Med. Certainly, the aspect of tax evasion can be lowered if cash registers are linked direct to a central repository which records every sale.

A study by PKF reviewed what other countries charge on food and drink. It is no surprise to note Luxembourg charges only 3% on food while both Germany and UK lowered the rate to 5%. while Paris charges 10% on food and 20% on alcohol. Italy and Cyprus charge 10% and 9% respectively.

If Clayton Bartolo, the minister responsible for tourism takes up the challenge to start a vat reform, one hopes there will be a commensurate reduction in menu prices while more vat is collected. A reduction in dining costs will partly counter balance inflationary pressure on food prices reported by NSO this year.

A lowering of the cost of dining and hotel services will mitigate social exclusion for pensioners and the lower-wage classes particularly now that restrictions on social gathering have been eased. Therefore, there is scope for an indirect tax reform the result of which will highlight the effect of positive indirect and induced multiplier effect resulting from a vat reduction.

Three years ago, Sunday Independent interviewed a key personality who runs a number of restaurants forming part of the giant food wholesaler and import firm. In his candid interview, he did not mince words and elaborated on the problems besetting the eateries. The root of the problem lies in the tax evasion besetting vat, payroll and corporate taxes while lamenting that kitchen and waiting staff from non-EU countries have left and replacement staff come at higher wages.

In general, there is now a shortage of trained staff on the market. Chefs, who are the fulcrum around which quality turns demand higher salaries. These salaries are sometimes only partly declared by restaurant owners. In a nutshell, restaurants located in prime sites are facing high rents, a severe lack of entry-level staff.

We ask ourselves why there has been only a handful of outlets qualifying for a Michelin star. These combined factors push owners to either abuse the system or conversely be tax compliant and trade on low margins. Some face failure. The spectre of rising rents and licenses makes one doubt if the landlord is earning more than the catering operator who risks so much time and energy to meet all the health and safety requirements.

In a spirited drive to float above the water, these conditions may ultimately lead to abuses arising by way of undeclared sales and wages thus evading vat, social taxes and finally corporate taxes. It goes without saying that such practises create a dichotomy – those who judiciously abide by the fiscal rules suffer a lower return on capital and others which misuse the system just scrape by.

An ex-finance minister Prof Scicluna was aware that evasion exists. He is reported to have exclaimed that “This is a continuous struggle. Abuse can be limited, but never eliminated. What we need to do is address the shadow economy and treat it as a beast on its own. It creates unfair competition and loss of revenue”.

Reminiscing of pre-pandemic when third country foreigners were employed to wait on tables, patrons used to complain that they cannot properly communicate their orders. Equally, there is a problem when engaging untrained locals as they are often found unreliable. Readers may disagree with such arguments.

Some accuse restaurant and hotel owners that they make-believe to be high class and over-charge. Others disagree with a reduction in vat saying restaurants are always full - especially the good ones and business is brisk - most expecting diners to book in advance for a table.

The sector survived due to a monthly wage supplement under the extended furlough scheme.

At the time when more promotional effort is being applied by MTA to attract new business (such as divers and students for English language schools), one cannot believe how Malta charges a higher rate of tax on eateries and hotel services when compared to the rate levied by competing Mediterranean countries.

On a positive note, one observes that patrons staying in hotels serving all “inclusive food and accommodation” in Malta as a concession enjoy a lower rate of 7% on their bills.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 30th September 2021
Get in touch: info@pkfmalta.com