It is of course now a legal requirement for a tenant deposit to be protected in an official deposit protection scheme (DPS). The procedure for returning or keeping a deposit will therefore depend on the terms of your scheme and and on your specific situation. But there are important considerations that apply across the board and which you should always be aware of. First and foremost:
1.) The deposit is at all times the tenant’s money until both parties agree otherwise or your scheme’s Alternative Dispute Resolution service (ADR) determines otherwise. You cannot make personal use of it during the tenancy even if you are holding it in an insurance-based scheme. In case of a dispute, you must deliver the disputed amount to the scheme per the administrator’s instructions.
2.) If there is a dispute, the burden of proof is always on you as the landlord (precisely because it is the tenant’s money).
Avoiding a Dispute: Obviously this is the ideal and you can go a long way to achieving it through your preliminary steps: a watertight tenancy agreement, clear tenant instructions, a thorough inventory and a comprehensive check out where both you and your tenant are present to discuss any issues. So much can be achieved with good communication so remind your tenant what is expected of them well in advance of the end of the tenancy.
Dealing with a Dispute: If you cannot come to an agreement with the tenant, follow the exact instructions given by your DPS provider for arranging an ADR. If you have an insurance-based scheme, make sure you deliver the full disputed amount to the provider within the correct timescale. You must also have clear and strong evidence for any claim you make, again submitted in the correct timescale. It will also benefit you if you can show that you tried to come to a compromise, so keep any details of such attempts.
For a full list of things which could be useful evidence in your favour, please see the official tenant deposit protection guide for landlords, which also has more details on the entire deposit return process.