Issue link: https://maltatoday.uberflip.com/i/1126183
06.06.19 12 OPINION George Mangion George M. Mangion is a senior partner of PKF Malta, an audit and consultancy firm | gmm@pkfmalta.com Improving profitability in restaurants T he predicament currently facing restaurant owners is a real one and something needs to be done to improve their chances to earn a fair rate of return on their business. e Malta Hotels and Restaurants As- sociation (MHRA) recently announced in a joint study with Deloitte about the sector that nearly half said they had de- clining revenues when compared to the previous winter. ey faced an escala- tion in operating costs of 2.3%. e alarming trend is the increase in hiring costs which went up by 5.7%. is exceeds the national average. e Times reports that at a recent presenta- tion of the study by Deloitte the pre- senter warned of a weaker trend ahead. He said "results aren't what we got used to. Previously, we had a number of years when the graphs kept going up." is was the result of various factors but the main theme was oversupply of hotels and restaurants increasing at a rate faster than the demand for rooms and tables. e prognosis leads one to conclude that the future is not so bright unless something is done to reverse the trend. One cannot simply blame the drop in profi ts on the unbridled increase in hotels and restaurants which we ex- perienced these past years when most hotels opted to avail themselves of the option to build more fl oors. How can government intervene (if any) to help the tourist sector going forward? Hotels already enjoy a competitive rate of 7% in vat when booking all-inclusive accommodation for visitors but the rate for restaurants remains high at 18%. e MHRA report shows inter alia, how restaurants are facing problems with some 56% claimed to have had an unsatisfactory winter performance. A solution can be a tax reform to 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 restaurant operators not to protest that they are being charged a higher rate of vat than similar busi- ness in other EU counties which com- pete head to head in the game to attract quality tourists. e author suggests how with a smart initiative one can achieve a level playing fi eld. e problem is not being tackled and while evasion and the black economy does mitigate some of the cost esca- lation 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. is brashness may well be anath- ema 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 quality cuisine resort. is article explains how taxation of catering establishments (whether it is fast food or silver service) can be im- proved by lowering vat to match the rates charged by our competitors in the Med. It is no surprise to note Luxem- bourg charges only 3% on food. Anoth- er novelty is Greece. At the peak of the Greek fi nancial cri- sis, in September 2011, the VAT rate for non-alcoholic restaurant sales in- creased 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 experimen- tal basis during which it transpired that more taxes were collected. On a business trip to Vietnam, I was charged 10% on dining. If Konrad Miz- zi, the minister responsible for tourism is bold enough to reduce the present rate of 18%, one hopes there will be a commensurate reduction in menu pric- es and due to higher compliance more vat is collected. ree years ago, e Sunday Inde- pendent interviewed Julian Sammut about the future of the industry. He is managing a number of outlets at Kitch- en Concepts Ltd., part of the giant food wholesaler and import fi rm Alf Mizzi & Sons. In his candid interview, he did not mince words and elaborated on the problems besetting the eateries. e classic approach is to criticise the sec- tor tarnishing it for alleged tax evasion both on vat, payroll and corporate taxes while lamenting that kitchen and wait- ing staff from non-EU countries are en- gaged for long hours at low rates. Chefs who are the fulcrum around which quality turns demand high salaries - sometimes only partly declared. Really and truly, restaurants located 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 enough profi ts to be able to re- furbish an aging restaurant ambience. ese combined factors push owners to either abuse the system or conversely be tax compliant and trade on low mar- gins. Some face failure. e spectre of ris- ing 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 qualifi ed staff . In a spirited drive to fl oat above the water, this may ultimately lead to ways how to undeclare sales and wages thus evading vat, social taxes and fi nally cor- porate taxes. It goes without saying that such abuses will create a dichoto- my – those who abide by the fi scal rules and suff er a lower return on capital in- vested and all the others which abuse of the system. e fi nance minister is well aware that abuse exists. He is reported to have exclaimed that " is 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". Oth- er observations centre on the quality of the service. As it is customary for foreigners to work as waiters, patrons complain that they cannot communicate eff ectively their orders. Equally there is a problem when engaging untrained locals as they are often found unreliable. e list of complaints goes on includ- ing accusations that some restaurant owners pretending to be high class when most of the time they are nothing close to the Michelin stable. Perhaps, this year in budget discussions we can start by seriously trying to revise down- wards the percentage of vat - this sure- ly makes restaurants more competitive when compared to the rest of the world. Restaurants located 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 enough profits to be able to refurbish an aging restaurant ambience