As I understand it, for a deposit of £5000 if there is a "VAT retention" of £1000 this held by the landlord as contingency if the tenant defaults and the landlord has to make use of the deposit. In our case, the other party then charged a further £1000 on top of this for VAT. Is this correct? I would assume that no VAT is charged on the "VAT retention"itself?
Just to be clear, which amount should be included in their quarters VAT Return? (I would assume £1000 and the "VAT Retention" would appear in the VAT Return only if the deposit were called upon by the landlord).
To dispel any doubt there was no question of default on the rent paid.
On termination of the lease the landlord refunded only £5000 on the grounds that as the VAT amounts are a receipt they would only be paid over to HMRC by ourselves as VAT anyway. If we assume this argument holds (and it itself seems illegal) then at the minimum they should have refunded is £5000 + £1000 being the "VAT retention".
The other party are a professional commercial property management company. Accordingly, I should be very interested in your comments and views.