Budget 2020 - notice the hike in restaurant costs | PFK Malta

Pouring over recent statistics, one notes how local prices of food have risen at more than double the average rate of the EU over the last decade. This creeping inflation was a silent one with a gentle rise of 2.9 per cent in Malta. It has not ruffled many feathers - yet it is more than twice the EU’s 1.4 per cent increase.

Official facts reveal how food prices went up by 3.74% in the year to August in general. When one digs deeper, one discovers that restaurant services and take-aways registered an increase in costs of 4.65 per cent. NSO declared that monthly increase in food prices was 0.80%, mostly due to higher prices for take-aways. Readers may doubt such statistics saying they did not notice any creep in prices at catering outlets. However, even cost of dining at home is edging up.

Eurostat figures issued in June showed that in 2018, the average price of food in Malta was 12 per cent higher than the EU average.

Naturally, there is no better authority to quote where restaurants are concerned other than MHRA. Last May, it conducted a scientific survey among 64 Maltese and Gozitan restaurant owners in collaboration with BOV. This produced a report conducted by a big four audit firm.

The aim was to evaluate individual restaurant performance during the last winter season. Inter alia, it discovered a proliferation of restaurants opening in every corner of the island. To put this in perspective, one notes that in 2012 there were 52 restaurant permits which in five years mushroomed to 343. Competition is healthy for consumers but perhaps in a tiny island such proliferation of permits has a weakening effect on quality.

According to this survey participants reported varying results, with nearly half saying they had declining revenues when compared to the previous winter. Notice how coastal areas, Valletta, and southern areas registered a negative trend of 4%, 2%, and 6% respectively. But, it is not all doom and gloom as areas in the north, central part and Gozo reported a healthy 3% increase in revenue.

Even so, one must not under rate the predicament facing the restaurant sector. A smart solution is tax reform to reduce cost of menus and achieve parity in vat rates reducing them to match those charged in other Med countries. Really and truly, there exists a sclerosis in the system that so far has blinded operators not to protest that residents in all-inclusive hotels are charged a combined rate of 7% on both food and accommodation while restaurants charge 18%.

Notice how southern Med countries charge a lower rate averaging 8% to 10%. The author suggests how with a nifty initiative, one can achieve a level playing field. There is a silent majority among some restaurant owners which cautions restraint - it is better not to rock the boat - let sleeping dogs lie and make hay while the sun shines. Such an attitude exacerbates the dire sustainability of the industry in the long term.

This article explains how taxation of catering establishments (whether it is fast food or silver service) can be improved by lowering vat to match the lower rates charged by our competitors in the Med. Everybody knows that MHRA conducts quarterly surveys to assess the competitiveness and occupancy rates registered by hotels and restaurants. This is a quality survey conducted by a Big Four audit firm and is sponsored by a leading local bank. While, we charge 18% on food, it is no surprise to note Luxembourg charges only 3%. Another novelty is Greece.

At the peak of the Greek financial crisis, in September 2011, the VAT rate for non-alcoholic restaurant sales increased from 13% to 23%, yet following pressure from the sector, government was persuaded to reduce it to 13% in August 2013 for a two-year experimental basis. This proved successful - during which it transpired that more taxes were collected. Therefore, there is scope for a scientific study to be conducted analysing the effect of positive indirect and induced multiplier effect resulting from a vat reduction. If menu prices go down, more sales should follow so it is prudent to expect that standards of quality in restaurants will improve.

Three years ago, the Sunday Independent interviewed a director managing a number of outlets at Kitchen Concepts Ltd., part of the giant food wholesaler and import firm Alf Mizzi & Sons. In his candid interview, he did not mince words and elaborated on the problems besetting the eateries. The root of the problem lies in rising costs of labour and rents. Chefs who are the fulcrum around which quality turns demand higher salaries - sometimes only partly declared.

In a nutshell, restaurants located in prime sites are facing problems such as increasing rents, a severe lack of entry-level staff and last but not least a race to the bottom to earn enough profits to be able to refurbish an aging restaurant ambience.

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 and succeed to retain an adequate number of qualified staff. In a spirited drive to float above the water, this may ultimately lead to under declaration of sales and wages thus evading vat, social taxes and finally corporate taxes.

It goes without saying that such abuses will create a dichotomy – those who abide by the fiscal rules and register a lower return on capital and the rest which in an effort to survive the rising tide of operational costs, sometimes this leads them to abuse of the system. The finance minister is well aware that abuse 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 black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue".

Other challenges are the availability of waiting staff. When foreigners are employed to fill the gaps, patrons complain that they cannot communicate their orders properly. Readers may disagree with such arguments. Some accuse restaurant owners that pretend to be high class when most of the time they do not qualify as pertaining to the Michelin stable.

Others disagree with such arguments, saying restaurants are always full - especially the good ones and business is brisk - expecting diners to book in advance for a good table. This bonanza comes not only as a result of the heavy increase in tourist arrivals and also due to more spending power in the hands of locals.

Perhaps, this budget we can start by seriously trying to revise downwards the percentage of vat on catering - this surely makes us more competitive when compared to Cyprus, Spain and Italy.