Westminster Council recently lost an appeal against a decision of the High Court in relation to a claim by sex shop owners that licence fees charged for running those establishments were unlawful (Hemming v The Lord Mayor and Citizens of Westminster [2013] EWCA Civ 591).

Whilst the Local Government Act 1982 permits a "reasonable fee" for granting operators of sex shops a licence, the recent judgment of the Court of Appeal emphasises that this is at odds with the Services Directive (2006/123/EC) and the Provision of Services Regulations 2009 which brought the Directive into force in the UK.

Article 13(2) of the Directive and Regulation 18(4) of the Regulations provide that charges provided for by a "competent body" which applicants under an authorisation scheme may incur must be reasonable and proportionate to the cost of the procedures and formalities under the scheme and must not exceed the cost of those procedures and formalities.

The issue for Westminster was that the annual licence fee comprised the following:

  •  £2,667 for administering involved in administering the application; and
  • £26,435 for the cost of enforcing the licensing scheme which included quarterly compliance visits to licensed sex shops and operations to deal with and prosecute unlicensed operators.

The judgment

The Court of Appeal held that the cost of enforcing the licensing regime against unlicensed operators did not fall within the relevant provisions of the Directive and the Regulations and was therefore unlawful. On that basis, an element of the annual £26,435 licence fee levied since the enforcement date of the relevant provisions (December 2009) had to be refunded to the Claimants for each year it had been charged exposing Westminster to potential refunds of £2m.

Impact for local authorities

The Directive and Regulations apply to a wide variety of authorisation regimes beyond the licensing of sex shops including for example much bigger licensing regimes such as alcohol and entertainment licenses under the Licensing Act 2003. It should be noted that there are some specific exceptions to the scope of the Regulations including certain financial services, healthcare services, gambling activities and social services. Nevertheless, Counsel for the sex shop owners has estimated that 600,000 different licenses in England and Wales are affected by the decision in the Westminster case.

Action to take now

We understand that Westminster is currently considering an appeal to the Supreme Court. Given the scope of the Directive and Regulations the outcome of any appeal could have wide reaching implications for the sector.  Authorities may, therefore, wish to consider supporting them in any appeal.

Authorities should also consider reviewing their existing licensing schemes  to identify if any of the current fee structures include charges which exceed the costs of the procedures and formalities permitted under the relevant Directive and 2009 Regulations.  If they have been set by reference to existing UK legislation which is incompatible with the Directive and Regulations it is likely those charges will be unlawful.  This also raises the question of the responsibility of Central Government to revoke any such legislative provisions.

If a licensee contacts your authority requesting a refund for previously paid licence fees or if you are unsure about whether a particular licensing scheme is subject to the Directive and Regulations or the fees you are currently charging are unlawful in light of the Westminster decision  we would be happy to provide you with specific advice.   

If you would like further information or advice about this alert please contact Virginia Cooper at Virginia.Cooper@bevanbrittan.com or 0370 194 7991 or contact Amy Tschobotko at Amy.Tschobotko@bevanbrittan.com or 0370 194 7750.  In the event that several authorities wish to take advice on this issue, it may be possible for authorities to form a collective with appropriate costs sharing arrangements.  We would be happy to facilitate any such arrangements.

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