PKF study shows eating out is getting expensive | PKF Malta

A PKF study illustrated the possible consequences on elasticity of demand should the government reduce the VAT rate on food to 7% and beverages to 13% on a two-year experimental period as was successfully done in Greece.

Indeed, both Spain and Italy charge 10% on restaurants and on the provision of meals and beverages to be consumed immediately, even if they are made after the recipient’s order, while Netherlands charges 6% on restaurants (excluding alcoholic beverages), take-away food; bars, cafes and night clubs. Poland charges 8% on food and 23% on all drinks including coffees.

We are more expensive than our competitors in Europe, yet notwithstanding an annual surplus there was no initiative to reduce vat in the 2018 budget; some may think this was because industry had benefited from reduced electricity and water tariffs (although a recent scoop discovered that ARMS may be overcharging due to the skewed way the reduced tariffs bands are allocated) but owners admit the sector is not rendering an adequate return on capital employed.

The sector consists of around 2,000 entities of varying size and employs thousands of workers. It has been resilient throughout the 2007-2013 world austerity cycle and really and truly one can say that it never received any Government subventions during the downturn as was the case with some manufacturing firms.

So where in the EU can you eat at the cheapest restaurant?  The trophy goes to Luxembourg as it charges the lowest rate of 3% on food and 17% on alcoholic beverages. Out of the EU, one admires India which reduced its GST on restaurants to a rate of 5 per cent, instead of 12 per cent or 18 per cent earlier.

The rate varies on whether food is served in Air Conditioned or non-AC restaurants. Needless to say, is there a discrimination when patrons are charged a full rate of 18% albeit a lower 7% on hotel accommodation and on meals served in hotels in case of combined all-inclusive food and drink packages.

It is a fact that most restaurant owners are facing problems which include increasing rents, a severe lack of entry-level staff and competition from foreigners setting up fast food outlets. These combined factors may push owners to either abuse the system or trade on low margins while the inevitable happens - that is quality suffers.

It is becoming evident that with restaurants located in prime sites one can conclude that landlords earn more than the catering operator even if the latter risks so much time and energy to meet all the health and safety requirements and to retain an adequate number of experienced staff.  It goes without saying that such a scenario creates 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 of the system by indulging in tax evasion or employing non-EU workers at low wages. Naturally industry leaders are aware that abuse exists.

The finance minister 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”.

Moving on, it is to be noted that the PKF study is based on a regression model to predict future figures for gross value added generated by restaurants of various grades and categories as well as gross value added generated by such eateries under both the current 18% rate and the suggested reduced rates.

Due to lack of information in certain areas, a number of assumptions were made to estimate a host of variables.  One may argue that reducing taxes on restaurants will render them more viable yet there is a risk that a tax reform may not feature in lower menu prices or an immediate and much desired improvement in quality.

The answer to this conundrum is that by motivating restaurant operators to face external challenges, this stimulus will attract larger volumes of tourists and there is a good chance they would improve services and invest in training better staff. The PKF model clearly showed that using a reduced rate of VAT on food and beverages served outside hotel premises renders a higher gross value added on restaurants. It is a sign of the times how our cost of living is slowly getting higher. So as the economy is on the mend a cut in taxation goes a long way and benefits the community more than the loss in State revenue.

This has been the proven experience of Greece where the economy has been battered during five years of austerity measures. Quoting figures released by the Bank of Greece, in May 2013 tourism income increased by 38.5% compared with the same month of the previous year. This increase in income is reflected by the increased number of arrivals in Greece by 24.4%. (Nikas, 2013).

It goes without saying that future success of any tax reform is subjective and there is a risk that menu prices will not fully reflect the reduction in taxes but in the long run one hopes that the improved profitability will lead towards a superior catering service.

As a conclusion, I wish to reproduce an extract from an interview of Jesper Svensson, Betsson’s CEO published by Vanessa McDonald in the Sunday Times of Malta.  According to Betsson (which is the largest iGaming company) “We are still attracting and hiring people – quite a few here and in other centres – but Malta is getting more and more expensive.”

The writing is on the wall that rents and cost of living are getting expensive even for the higher paid iGaming workers let alone for those on a lower salary. Why not revise downwards consumption taxes?  Many economists quoting a number of international studies argue that the problem of tax evasion is mitigated in countries when a smart reform introduces an equitable rate.

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 PKF instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.