The Malta Independent 16 December 2017, Saturday

Cheaper meals and the feel-good factor

George M Mangion Wednesday, 6 December 2017, 10:14 Last update: about 9 days ago

Last week, British Chancellor of the Exchequer Philip Hammond presented his budget in the House of Commons amid an atmosphere of subdued elation given that neither the economy nor public finances are in a great shape. As The Economist commented, Britons are being increasingly fed up with stagnating living standards. He had difficulty cheer the Commons given low productivity growth yet he boldly tried to square the circle having little fiscal and political room to manoeuvre. In contrast, our budget for next year is more positive. Our A+ rating has strengthened the resolve of the finance minister to be more generous, particularly due to the small surplus which has emboldened the government to offer a salary increase to the entire cohort of teachers and parts of Air Malta's staff.

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With this background, it is opportune to examine a revision of the tax on outside catering to be reduced from the present high rate of 18 per cent. A quick review of VAT charged to restaurants in Europe shows how Greece, in a bid to aid small business, bolstered the tourism sector and to reduce evasion reduced its rate in August 2013 from 23 per cent to 13 per cent on a trial basis. The experiment worked; it yielded good results for a two-year period with higher VAT declarations and succeeded in attracting more visitors. Due to austerity measures, the rate was returned to 23 per cent in July 2015.

Similarly, we find that Spain and Italy charge 10 per cent on restaurants and the provision of meals and beverages consumed immediately, even if they are made after the recipient's order, while The Netherlands charges restaurants six per cent (excluding alcoholic beverages), take-away food, bars, cafes and nightclubs. The trophy goes to Luxembourg as it charges the lowest rate of three per cent on food and 17 per cent on alcoholic beverages. Therefore, we ask why Malta charges a full rate of 18 per cent on restaurant business, albeit seven per cent on hotel accommodation and on meals served on combined all-inclusive food and drink packages.

Now that the tourism industry is firing on all cylinders, can we follow Greece's bold experiment and drop the rate on restaurants to 13 per cent for a two-year trial period. This article explains how burning the candle at both ends will cause the catering sector to implode if remedial action is not taken to tackle challenges lurking under the surface. In the meantime, PKF as part of its corporate social responsibility has concluded a study after obtaining details of business activity by interviewing a random selection of restaurant owners. The study shows that the amount of tax forfeited by government is less than the economic gain arising by multiplier effect due to higher demand.

In so doing, it acknowledges the views of Julian Sammut (a committed restaurant owner and successful businessman) who was interviewed exclusively on The Malta Independent on Sunday about the future of the industry. He manages more than 10 major outlets at Kitchen Concepts Ltd, part of the giant food wholesaler and import firm of Alf Mizzi & Sons. In his candid interview, he did not mince his words and spoke bluntly about the problems besetting the eateries. In his opinion, these chronic problems unless remedied could lead to a cataclysmic downfall of the tourist industry. The antidote of the problem lurks in tax evasion on both VAT and corporate taxes, while a good proportion of kitchen and waiting staff are employed at low rates or sometimes paid under the table. These shenanigans continue unabated.

One can call this situation a paradox when contemplating the substantial funds the government allocates to MTA to promote higher catering standards partly by grading restaurants and in general by bolstering tourist arrivals. This is done by supporting new traffic from a cluster of new locations served by low cost carriers. Sadly, ignoring the problem by papering over the cracks will not solve the issue of a dire financial situation facing some catering owners due largely to a fragmented market sector. Julian remarked that some owners are facing increasing rents, a severe lack of entry-level staff, and last but not least, competition from foreigners setting up fast food outlets. These combined factors push owners to either abuse the system or trade on low margins and in the end face failure. This begs the question - does the landlord earn more than the catering operator who puts in so much time and energy to meet all the health and safety requirements and retain an adequate number of experienced staff.

Such a strategy is, in an inexcusable way, a short-term solution to afford paying higher wages and salaries necessary for staff retention. It goes without saying that such abuses will create a two-way structure - those who abide by the fiscal rules and suffer a lower return on capital and the rest who in varying degrees abuse the system and by employing non-EU workers and paying them low wages. Naturally, leaders in the industry are aware that abuse exists. The finance minister is reported to have commented: "This is a continuous struggle. Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue,." Even though prima facie business looks promising, yet more restaurant owners struggle to retain quality staff. When foreigners are employed to fill the gaps, patrons complain that they cannot communicate properly. Equally, there is a problem with employing part-time ITS students as they are often indecisive.

Readers may disagree with such arguments. Some criticize restaurant owners who charge high menu rates by pretending they offer a Michelin star service. Unless the situation is diagnosed by way of a scientific study, one can conclude that as restaurants are always full they must be doing well. Surely mounting affluence generates more sprees at good restaurants; on the contrary, reality tells us that as more tourists are opting to book private accommodation as opposed to hotels they may prefer to eat in house. In conclusion, the PKF study shows that restaurant owners face challenges due to cutthroat competition (now with many eateries opening up run by foreigners mushrooming all over the island) compounded by an unrelenting increase in property rents. If a cut in VAT is approved, this will certainly boost a feel-good factor thanks to an economy showing a modest surplus.

 

Copies of the PKF study can be obtained by writing to Dr Marilyn Formosa at info@pkfmalta.com.

Mr Mangion is a senior partner at PKF, an audit and consultancy firm and can be contacted at gmm@pkfmalta.com or on +356 2149 3041


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