Tax incentives and the future of the family stores | PKF

A quick review of VAT charged on restaurants in southern Europe shows how Greece five years ago reduced VAT on catering from 23% to 13% in a bid to aid small business, bolster the tourism sector and reduce tax evasion. The experiment worked and yielded good results for a two-year period with higher VAT declarations.  

Due to austerity measures, the rate was reverted to 23% in 2015.  Similarly, we find how 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. The trophy goes to Luxembourg as it charges the lowest rate of 3% on food and 17% on alcoholic beverages.  

Needless to say it is a jaw-dropping experience when we ask why Malta charges a full rate of 18% on restaurant business albeit a concessionary rate of 7% on hotel accommodation including combined all-inclusive food and drink packages.

Now that the tourism industry is firing on all cylinders and the economy is reporting a small surplus can we follow Greece’s bold experiment and drop the rate on restaurants to 13%? Some commentators disagree, saying that any marginal drop in tax will not feature in lower menu prices.

Why reduce cost of eating out when more tax can be collected especially noting tourist arrivals are on an upward trajectory (although 80% of the increase book with AirBnB)?

They argue that if any reform is necessary to minimise under declarations of VAT, then a better solution is to stratify the VAT rate according to the type of restaurant – be it high class, medium and fast food category.

This may be another variant of the way the catering industry can be assisted in the next budget in order to regenerate itself and improve the national product. It may start affording to pay better staff salaries and refurbish its faded décor. Moving on to the retail sector one can also meet with a number of complaints from village shop owners.

These toil for long hours and face cost-cutting deals negotiated by mega stores which kill their unique advantage as they open all hours and provide a personal service to the community.

“Open all hours” reminds us of a popular TV series written for the BBC about Arkwright a hard-working British shop owner lovingly played by the late Ronnie Barker in a comedy – a unique anthropological series. This TV series set in the seventies may not fully project a true picture of the sacrifices now faced by family retailers in a competitive market dominated with supermarkets – all offering cut-price products in modern fully air-conditioned stalls.

Then there is the curse of unbridled bureaucracy and the reality-check having savvy households increasing buying products ordered online. Banks are also getting risk averse and only lend against top collateral and prefer established businesses. In the run-up to last year’s general election, PN proclaimed that once elected to government it will create a business clinic – a one-stop-shop – to help self-employed persons who currently face untold difficulties to make ends meet.

It also promised to create an 'Access Point' within Pieta headquarters for self-employed persons to receive free advice on how to succeed getting access to soft loans, tips on how to be tax compliant, and other marketing ideas. PN also proposed the building of a ‘Data Bank’ –another novel idea.

Once elected, it visualised giving full access to PN clubs in towns and villages to serve as offices so that self-employed can get advice from mentors – a boon to help run their business. An idea was doing the rounds that PN aimed to encourage growth of start-ups by suggesting a reduction in the next budget of the income tax rate paid by small businesses to 10% on the first €50,000 of operating profits.

With hindsight, one reminisces how seven years ago the mantra of helping SME’s was the hobby horse of Jason Azzopardi (the ex-minister in the PN administration responsible for piloting the Small Business Act – SBA in 2011). The SBA mirrors EU directives which is based on the Competitiveness Council policy on ‘Think Small First principle’. Historically it formed part of the ubiquitous Small Business Act for Europe (SBA) endorsed by the European Council in 2008. Sadly, SBA now rests silently in a library of dead letter legislation which is gathering dust on some nondescript shelf in a colonial building aka the Main Guard – facing the palace in St George Square, Valletta.

Theoretically it targets the business category employing less than 250, i.e. the overwhelming majority of enterprises in Malta. No prize for guessing that it makes good economic sense to cater for SME’s rather than always accommodate the bigger fish in the pond.

There has been talk that developers risking millions in mega projects of luxury apartments and offices are the flavour of the month at Castille. Certainly, the resulting multiplier effect has created a sustained shortage of workers and pushed rents sky high. Is it true that developers, financiers and top estate agents may be reaping millions while start-ups labour hard picking crumbs from the rich man’s table? 

Readers may say this sounds like a battle cry extolling the plight of the less privileged who ache seeing the fat cats tastefully lick their fingers at the banquet – asking for more.  Back to SBA – can we ignore its inimitability now that the economy is firing on all cylinders?

The act proposed the formation of a college of regulators expected to meet to harmonise laws and help remove overlapping rules and cut unnecessary bureaucracy. Sadly, during the past years there has been few such meetings. Another SBA rule asserts that before any public sector entity introduces new burdens it is obliged to carry out a customer satisfaction survey with the aim to measure its impact.  

It goes without saying that such surveys if and when conducted do not always result in mitigation measures.

In conclusion, last month the finance minister gratuitously paid a one-time tax refund to all workers and inter alia this helped generate a better cash flow for village retailers. Government may again rise to the occasion and magnanimously offer a helping hand by introducing a preferential small business tax.

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 Malta 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.