The Rental Reimbursement Scheme (“RRS”) is a popular tax-saving arrangement for salaried employees offering housing benefits in the form of a place of residence instead of a cash allowance by employers. Management of RRS claims is a tedious process for most companies involving application verification, lease agreement monitoring, claims validation, claims tracking, and recordkeeping. An effective control system that includes a well-defined housing benefits policy and a digital system to manage claims will secure the process and prevent abuse of the benefits.
Setting proper control over rental reimbursement arrangement
The Hong Kong Inland Revenue Department (“IRD”) has become increasingly stringent in assessing taxable housing benefits, which makes it imperative that employers who already have RRS in place or those that are interested in setting up such schemes understand the prevailing requirements and rules thoroughly.
An effective control system for rental reimbursements can ensure that employers and employees are compliant with the RRS policy and able to mitigate the chance of getting scrutinized by the IRD. Measures to be implemented can include establishing a clearly defined housing benefits policy.
Most companies struggle with the actual administration of the scheme and find it cumbersome to monitor the whole process from application to claim.
Application
Some companies adopt a time window for applications to be submitted. Employees are not allowed to participate in RRS after passing of the deadline. This is done to improve process efficiency and to decrease administrative burden. In addition, delays also create potential issues on late application and back dating of documents retrospectively. RRS is arranged based on the intention between the employer and employee to enter into an employment contract. Businesses should consider if they want to implement a strict application window or allow a certain flexibility in the application, while also setting a proper procedure on commencement of the reimbursement term.
The general lease term in Hong Kong is two years but is subject to negotiation. It is common to see a lease getting expired during a tax year. Employee may also change their place of accommodation earlier and there will be issues such as overlapping of rental period for two places of accommodation. A proper control process should be put in place to cater for any changes to the lease arrangement. For example, reminding an employee to renew the application and to provide necessary updates for any changes as most RRS requires a valid agreement to support the arrangement.
Claim
The Inland Revenue Ordinance does not contain any provision in relation to qualifying expenditure for rental reimbursement. It the IRD's current practice to accept rent, property management fee and government rent and rates. In order to streamline the administrative process, most companies only accept rent and expenses which are inclusive in the monthly rental payment. Considerations should be made if these expenses should be qualified if they are paid separately. Proper administrative procedures should be in place to verify these variable expenses.
Most business and individuals are impacted by the recent COVID-19. It is common to see tenants getting a rental reduction from their landlords. There will be an impact on the regular monthly reimbursement claim, especially if the reduction is for an interim period that does not fall into the normal arrangement. Companies should consider these changes in their claim process and ensure that they will not cross the reimbursement limits of the rental expenses which would result in violation of the RRS policy and tax arrangement.
Other relevant RRS activities also include:
- Verifying the eligibility of the applications and determining the amount approved of rental reimbursement.
- Monitoring the expiry of lease agreement and following up the outstanding supporting documents from applicants.
- Examining the claims including checking the completeness of the supporting documents and the actual payment of rent against the tenancy agreement.
- Keeping track of applications and claims status from application to completion.
- Maintaining the supporting documents as records.
These administrative tasks are tedious but critical to maintain proper control over the RRS.
Managing RRS through intelligent technology
e-Rental portal is a comprehensive solution to streamlining rental reimbursement processes and reducing administrative workload on HR departments. Traditional administration processes for RRS, such as paper forms approval, are inefficient and error-prone. Poorly managed RRS programs may result in the entire program being rejected by the IRD. Key considerations for adopting a digital system for RRS management and ensuring a well-implemented scheme include:
- Auto-Checking on eligibility and entitlement
Errors in claim submissions are common and sometimes excessive claims may be made. In-built validation rules which check applicant’s eligibility and calculate entitlements according to your internal policy, will help with verification even before the claimant submits their documents. - Ensure timely filing of applications, claims and supporting documentation
Late or last-minute submissions are the bane of claims processing. A system with an ability to automatically send alerts and reminders will both ensure that employees submit their outstanding claims/documents as well as ensure that HR professionals process the pending claims in a timely manner. Our system caters for a flexible RRS application window. Employees will be reminded to make the application in respect of an expiring lease. - Configuration according to RRS requirements
Our e-portal caters for mid-month lease claim and changes to the rental claim. Expenses such as management fees and government rates can be added and easily administered. Employee’s claims are automatically calculated according to the RRS requirements. Ad-hoc changes such as temporary rental reduction can be updated and calculated in our e-portal. - Process automation
Every HR team needs an efficient work-flow management system to streamline and speed up processes and replace manually executed tasks with automated processes. A good system will allow end-to-end management of the processes and automatically log communication between HR team and employee for transparency. - Historical records
Audits and verifications often require a review of historical data of an applicant’s claims. This information may also be needed for assessment of policy changes. Thus, it is recommended that your e-Rental system maintain and allow easy retrieval of historical data for employees. - Integration with payroll and tax reporting systems
Ensure that the e-Rental system can integrate with existing payroll and tax reporting systems to validate consistency of amount eligible and claimed by the employees. It should also allow for immediate and dynamic generation of reimbursement data for your year-end reporting.
Streamlining administration to drive company success
Today’s market is increasingly challenging for organisations working in the global arena. Globalisation, digitisation, compliance, integration and talent are key factors forcing HR teams to change their processes and decision-making to be more strategic and forward-thinking. RRS has been implemented in Hong Kong by most companies to enhance employee experience and offers the benefit of increased net take home pay and a tax-efficient remuneration package. It also serves to boost employee morale and retain talents. However, the actual administration of RRS can be a pain point for Human Resource professionals and can detract from core business processes.
Tricor is experienced in formulating and implementing a tailored scheme policy and guidelines. Our eRental portal helps automate workflows and reduces the administrative hassle, making the whole process convenient for both HR and employees. More importantly our solution reduces the risks of inaccurate reporting to the IRD and protects your company from any possibility of penalization and reputation damage.
