Sex shops prevail in EU licensing ruling as council regime given red light

Sex shops prevail in EU licensing ruling as council regime given red light

Steve Dillon, Head of Insolvency and a partner in the Commercial Litigation team at Gosschalks, examines the latest twist in the Westminster sex shop licensing litigation as the Court of Justice gives its ruling on the lawfulness of the council licensing scheme.

Original news

C-316/15: R (on the application of Hemming, trading as ‘Simply Pleasure Ltd’ and others) v Westminster City Council [2016] All ER (D) 97 (Nov)

The Court of Justice of the European Union gave a preliminary ruling, deciding that article 13(2) of the EU Services Directive (EC) 2006/123 had to be interpreted as precluding, in circumstances such as those at issue in the main proceedings, the requirement for the payment of a fee, at the time of submitting an application for the grant or renewal of authorisation, part of which corresponded to the costs relating to the management and enforcement of the authorisation scheme concerned, even if that part was refundable if that application was refused.

What was the background to this case?

Since February 2005, Westminster City Council had charged sex shops applying for an annual renewal of their licence a total fee of about £29,000 payable upon application.

Between 2006 and 2011 Westminster hadn’t lawfully determined any fee at all, instead simply applying the previous year’s fee with no due consideration.

Of the £29,000, only £2,000 represented the costs of processing the application, while more than £26,000 represented the costs of managing and enforcing the licensing regime, virtually all of which was investigating and prosecuting unlicensed traders (termed ‘perimeter enforcement’ during the Supreme Court proceedings).

The claimants argued that EU Services Directive, art 13 (2) capped the lawful fee at the cost to Westminster of processing the application.

The High Court and Court of Appeal agreed with the claimants, along the way requiring Westminster to determine a lawful fee and confirming that local authorities running such licensing schemes must take into account deficits and profits from previous licensing years when setting a fee (subject to the cap) and that the normal principles of Part 36 of the Civil Procedure Rules, SI 1998/3132 (CPR) applied to public law claims just as they did to private law claims.

Pursuant to the judgment, Westminster returned some £1.4m in overpaid licence fees to the claimants after the Court of Appeal’s judgment, but also obtained leave to appeal to the Supreme Court.

Following the intervention by several professional regulatory bodies—including the Law Society, the Solicitor’s Regulatory Authority, Bar Council and the Bar Standards Board—the Supreme Court viewed things in a slightly different way.

Giving the lead judgment, Lord Mance did agree with the lower courts in rejecting (with ‘no hesitation’) Westminster’s argument that the concept of ‘authorisation procedures and formalities’ in EU Services Directive, art 13(2) included all aspects of the licensing regime, including the costs of enforcement against unlicensed operators.

EU Services Directive, art 13(2) was only, he reasoned, concerned with authorisation procedures at the stage when someone was seeking permission for authorisation.

Given this, he reasoned that nothing in EU Services Directive, art 13(2) prevented a licensing authority from charging a fee for the possession or retention of a licence which could include such wider costs as were sought by Westminster, and was in no doubt that such a charge could be raised after an application for licence had been successful.

What issue did the Supreme Court refer to the Court of Justice?

Lord Mance also thought that such a ‘success fee’ might be lawfully charged at the point of application if the success element was refundable on a failed application (although there was no evidence before the court that any part of the fees charged by Westminster were refundable).

This depended upon whether a refundable ‘success’ fee payable on application constituted a charge incurred from the application and, therefore, subject to the fee cap in EU Services Directive, art 13(2).

The Supreme Court referred two questions to the Court of Justice to determine this question:

  1. Does the requirement to pay a refundable fee on application fee mean as a matter of European law (and without anything more) that a charge was incurred from the application and was therefore unlawful to the extent it exceeded the cap in EU Services Directive, art 13(2)?
  2. Does a conclusion that it was a charge depend upon other circumstances, such as whether it resulted in additional cost to the application, the size of the refundable part and the period for which it was held, or any quantifiable saving in processing applications from requiring ‘up front’ fees?

What did it decide?

In a relatively brief judgment, the Court of Justice decided that the simple fact that a fee must be paid constituted a financial obligation which an applicant must pay in order for his application to be considered.

A success fee payable upon application was therefore undoubtedly a charge incurred from the application and subject to the cap in EU Services Directive, art 13(2).

The fact that it was refundable if the licence application failed had no bearing on ascertaining whether it was a charge.

What does this decision mean for licensing authorities in practice?

Although some licensing authorities may have already changed practice to a success fee being charged after a licence application has been successful following the guidance of Lord Mance, the rest may now have to follow suit.

Even under such a structure they must be mindful that EU Services Directive, art 13(2) requires any fee to be reasonable and proportionate.

What financial consequences will this have for licensing authorities?

Most licensing authorities, having charged annual licence fees to operators of sex shops as part of their application fee for many years, will be faced with the prospect of repaying licensees significant sums by way of any of those fees which exceeded the costs of processing the applications.

What does this decision mean for other licensing and regulatory authorities that operate similar regimes?

Many other regulatory authorities—including some of the bodies that intervening in the Supreme Court case—already recoup the costs of ‘perimeter enforcement’ from ongoing charges rather than the initial application for authorisation.

Those operating authorisation schemes that don’t may either have to change to fit or write such costs off.

Any other points of interest?

In advance of the Court of Justice giving its judgment, its Advocate-General (AG) gave his formal opinion on the case in July 2016. While the Court of Justice strictly restricted its judgment to the referred questions, its AG made some wider observations including that:

  • there seemed to be no overriding reason why the authorisation granted by Westminster’s licences should be limited to a duration of one year—EU Services Directive, art 11 prohibits limited periods of authorisation save where the authorisation is renewed automatically, the number of available authorisations is limited by an overriding reason of public interest or a limited duration can be justified by an overriding reason relating to the public interest
  • the fact that the domestic power to charge these licence fees (contained in Schedule 3 to the Local Government (Miscellaneous Provisions) Act 1982 (LG(MP)A 1982) contained grounds for refusing authorisations based on residence and nationality which seemed to be prohibited by EU Services Directive, art 14
  • the domestic power to charge for these licences therefore raises problems of incompatibility with the EU Services Directive other than those at issue in Hemming

These wider problems are perhaps not surprising given that LG(MP)A 1982, Sch 3 was in force more than 25 years before the EU Services Directive and the UK’s implementation of the EU Services Directive via the Provision of Services Regulations 2009, SI 2009/2999 failed to take the opportunity to update LG(MP)A 1982, Sch 3.

It is possible that they will be the subject of further litigation.

Steve Dillon has represented the claimant/respondent retailers throughout R (Hemming) v Westminster City Council.

Interviewed by Kate Beaumont.

Source: Lexis®PSL. This article was first published on Lexis®PSL Local Government analysis on 28 November 2016. 

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