Over the past couple of years the buy to let investor has come under increasing regulation and scrutiny. The agenda lurches from Houses in multiple occupation from April 6 2006, Energy performance certificates from 1st October 2008, Tenancy Deposit Schemes from April 6th 2007 while Her Majesty’s Revenue and Customs have access to the Tenancy Deposit Scheme database and have been reported as compiling a profile of tax evading buy-to-let landlords. The “Terms and Conditions” of two of the Tenancy Deposit Schemes explicitly state that information given to them by clients will be passed on to regulators such as HMRC “for purposes of fraud and money laundering prevention”. Tax evasion is treated as both fraud and money laundering. While a news article previously has also highlighted further HMRC involvement ( 'buy-to-let landlord ensnared by taxman') but which pertained to the rules of the Government’s Construction Industry Scheme (CIS), revised in 2007.

HMO regulation was introduced o protect tenants and raise standards as these HMO occupiers were generally seen as amongst the most vulnerable and disadvantaged members of society. The Tenancy Deposit Scheme to protect tenancy deposits and provide a fairer system for settling disputes over the return of a deposit at the end of a tenancy, therefore to all intents and purposes to protect the tenant. However what has seen relatively little coverage is the fact that this scheme has taken a new twist that landlords should be aware of.

Since the legislation was put in place in April 2007 unscrupulous tenants (often students), have exploited a money making loophole within the law. When the landlord had either lodged the deposit with the third party and/or the insurance based scheme tenants had to be informed within 14 days of paying the funds. Failure to do either meant the landlord was liable to pay the tenants 'three times' the value of their deposits. If six tenants paid 1 months deposit of £300 this would be an £1,800 deposit, thus representing a £5,400 penalty to be shared out along with the return of the original deposit. Students were well aware of this and saw it as very profitable, threatening often amateur landlords who had oversights on the paperwork process with court action. Numbers of landlords settled up rather than fight a protracted claim.

However this scam now seems to have been brought to an end at Leeds county court which should bring comfort to landlords throughout the country. Solicitors have successfully argued that the law intended that the three times deposit payment should be made only if no protection measures had been set up and the tenant informed by the time the case came to court. Buy-to-let investors and landlords will be heartened that a simple administrative oversight will no longer leave them at risk. It is widely hoped that this 'scam' has been brought to an end. Although a court decision will not be binding on other courts, it can certainly be used as persuasion in future cases and would be hoped to be seen as a precedent.

Copyright © 2009 First Mortgage Trust