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 would be a tax reform to achieve parity in VAT rates by reducing them to match those charged in other Mediterranean countries. Really and truly, there exists a sclerosis in the system that so far has blinded operators not to take up arms and protest that they are being charged a higher rate of vat than similar business in other EU counties which compete to attract quality tourists.

This article shows how, with a smart initiative, a level playing field can be achieved. I acknowledge that the sector is known to under-declare sales in an effort to meet increasing overheads and the fierce competition from packaged tour rates charged at seven per cent in most hotels. The solution is not being tackled and while evasion and the black economy does mitigate some of the cost escalation registered in catering products (mainly food and drinks) there is a silent majority that says it is better not to rock the boat, let sleeping dogs lie and make hay while the sun shines.  Such an attitude exacerbates the actual 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 left unchecked, may lead to tomorrow's deterioration of our image as a high cuisine resort. This article explains how the taxation of catering establishments (whether it is fast food or silver service) can be improved by lowering the VAT rate to match the lower rates charged by our competitors in the Mediterranean area. Everybody knows that the Malta Hotels and Restaurants Association (MHRA) conducts quarterly surveys to assess the competitiveness and occupancy rates registered by all types of hotels.

This is a quality survey conducted by a Big Four audit firm and is sponsored by a leading local bank.  No such study is carried out in the restaurant sector. PKF offered to prepare such a study, on a complimentary basis, having obtained details of revenue from restaurant declarations for previous years. It asked for permission to approach the MHRA's members to carry out a confidential study of their operating structures. The MHRA, which does not hold financial data on its members, agreed to our request but felt that if it was to endorse our study, we had to pay a fee.

 Naturally, PKF in turn wrote to BOV for sponsorship but the matter is currently still under consideration. Regardless of this setback, PKF began its review by checking what other countries charge on food and drink.

It was no surprise to note that Luxembourg charges only three per cent on food. Another novelty is Greece. In September 2011, at the peak of the Greek financial crisis, the VAT rate for non-alcoholic restaurant sales increased from 13 per cent to 23 per cent but, following pressure from the sector, the government was persuaded to bring the rate down. It was reduced to 13 per cent in August 2013 for a two-year experimental basis, during which it transpired that more taxes were collected.  

If the Minister responsible for local tourism is bold enough to reduce the present rate of 18 per cent, there is no doubt that - in a short period - there will be a commensurate reduction in menu prices and more VAT will be collected.  There is, therefore, scope for a scientific study to be conducted to guide the government, assuring it that once VAT goes down to a more competitive level, quality standards in restaurants will improve and international studies have shown that this will lead to less tax evasion.  

PKF acknowledges the pioneering work carried out in the sector by Julian Sammut, a fervent an enthusiastic restaurant owner and successful businessman who, three years ago, was interviewed by The Malta Independent on Sunday regarding the future of the industry.

He Mr Sammut stands as a colossus in the restaurant sector and is managing more than a number a considerable number of outlets at Kitchen Concepts Ltd, part of the giant food wholesaler and import company Alf Mizzi & Sons Ltd. In his candid interview, he did not mince his words regarding the problems facing the eateries catering establishments. In his opinion, unless they are remedied, these chronic problems may lead to a cataclysmic downfall of the tourist industry. The root of the problem lies in the tax evasion - both on VAT and corporate taxes - while noting that a good proportion of kitchen and waiting staff from non-EU countries are engaged for long hours at low rates of pay.

Chefs - the fulcrum around which quality turns - are paid higher rate, which are sometimes only partly declared and the practice of papering over the cracks will not resolve the issue. Restaurants in prime sites are facing increasing rents, a severe lack of entry-level staff and, last but not least, a race to the bottom to earn sufficient profits to be able to fund the refurbishing of an aging restaurant.

These combined factors push owners to either abuse the system or be fully tax-compliant and trade on low margins. Some face failure. The spectre of rising rents and licence costs makes one doubt if the landlord is earning more than the catering operator, who expends so much time and energy to meet all the health and safety requirements and succeed in retaining an adequate number of qualified staff.

In a spirited drive desperate effort to stay above the water, this may ultimately lead to money-laundering through undeclared sales and wages, thus evading VAT, social taxes and, finally, corporate taxes. It goes without saying that such abuse will create a dichotomy - those who abide by the fiscal rules and suffer a lower return on capital invested, and all the others that abuse the system. The current trend to employ non-EU workers at low wages will not resolve quality issues.

The Finance Minister is well aware that abuse exits. He is reported to have exclaimed that has having said: "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 a loss of revenue."

When foreigners are employed to fill the gaps, customers complain that they cannot communicate their orders properly.  Equally, there is a problem when engaging untrained locals as they are often found unreliable. Readers may disagree with such arguments. Some accuse restaurant owners of pretending to be high class when most of the time they do not qualify as qualifying for the Michelin stable. Others disagree, saying restaurants are always full - especially the good ones - and business is brisk, with diners expected to book in advance for a good table. This bonanza comes not only as a result of the increase in the number of tourists but also due to the fact that there is more spending power in the hands of locals. Perhaps, this year we can start by seriously trying to revise downwards the VAT percentage, which would surely make us more competitive.

 

 

George Mangion is a senior partner of an audit and consultancy firm, and has over twenty-five years' experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.

 

George can be contacted at [email protected] or on +356 21493041