Good outcome for local authorities in Westminster sex shop case

Introduction – the Supreme Court's decision

The central issue in Hemming is whether it is lawful to charge as part of a licence fee for more than the cost associated with granting and maintaining the licence at the application stage.  The decision in the Court of Appeal raised the prospect that the licence fee could only be used for limited purposes and for example it would not be possible to use the proceeds of licence fees to fund enforcement against those operating without a licence.  The cost of this would need to be found from other sources. This issue affected all bodies who operate a licence scheme within the terms of the Provision of Services (POS) Regulations 2009 and the Services Directive 2006/123.  The Court of Appeal's decision raised some concern not only within local authorities, but also central government and regulators, and indeed there were several interventions into the Supreme Court proceedings.  The central concern was that the cost of anything not directly related to granting the licence such as "perimeter enforcement" would need to be found from other sources such as council tax payers or general taxation.  

The Supreme Court's decision draws a distinction under POS between the fee charged to deal with an initial application for a licence and the further fee(s) to maintain the licence which are subject to different requirements under the Directive.  As such, if an initial charge for an application fee is made and a further charge sought once the licence is granted then according to the Supreme Court, subject to the further requirements under the Directive, this is lawful.  However, the Supreme Court found the position where both the application fee and the further charge are made at the outset more problematic even if the further charge is refunded following an unsuccessful application.  The Supreme Court has referred this issue to the European Court of Justice (ECJ) for determination.

Practical Consequences

Following the Supreme Court's decision, any organisation that operates a licensing scheme under POS needs to review its charging arrangements to ensure they comply with the Hemming decision and if possible change them to make them compliant.  If it is not possible to make changes because for example the scheme is statutory then further clarification will be issued by the ECJ in due course.  POS does not apply to schemes relating to Healthcare, Financial Services and Transport so it may be that some schemes fall outside POS in any event.

The Court of Appeal's decision

This case concerned a claim by sex shop owners that licence fees charged by Westminster City Council for running sex shops were unlawful. Westminster lost in the Court of Appeal (Hemming v Westminster City Council [2013] EWCA Civ 591).
The Court of Appeal held that, whilst the Local Government Act 1982 permits a "reasonable fee" for granting operators of sex shops a licence, this was at odds with the Directive and the POS Regulations 2009 which brought the Directive into force in the UK. Article 13(2) of the Directive and Regulation 18(4) provide that charges provided for by a "competent body" which applicants under an authorisation scheme may incur must not be dissuasive or unduly complicate or delay the provision of service and 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 Court of Appeal ruled 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 it was therefore unlawful to include those costs in the licence fee. On that basis, an element of the annual £26,435 licence fee levied by Westminster 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. Westminster appealed to the Supreme Court.

The Supreme Court's judgment

The Respondent sex shop owners argued that the costs payable by applicants on account of the costs of enforcement of the licensing scheme which were (although refundable) unrelated to the costs of processing applications should have been borne out of Westminster's general funds and/or were, although payable on application by all applicants, sums which could only benefit successful applicants. By way of example, for the year 2011/12, the total licensing fee was £29,102, of which £2,667 related to the administration of the licence and was non-returnable, while £26,435 related to the management of the licensing scheme and was non-refundable if the application was refused.

The Supreme Court found that as a matter of domestic law, under the relevant governing statute, it was open to a licensing authority to require an applicant for the grant or renewal of a licence to pay a fee to cover the running and enforcement costs of a licensing scheme, and to make this fee payable either: (a) outright, as and when the licence is actually granted pursuant to the application; or (b) on a refundable basis, at the time when the application is lodged.

The Supreme Court considered that the provisions of the Directive suggest that the actual regulation of or access to or the exercise of a service activity is a distinct matter from any prior authorisation scheme and its procedures.

The Supreme Court rejected Westminster's argument that the concept of "authorisation procedures and formalities" can be interpreted widely enough to cover all aspects of the licensing scheme. However, the Supreme Court held that Article 13(2) of the Directive and Regulation 18 of the POS Regulations are concerned – and concerned only – with charges made in respect of authorisation procedures and their costs and that nothing in Article 13(2) precludes a licensing authority from charging a fee for the possession or retention of a licence, and making this licence conditional upon payment of a fee. Any such fee would however have to comply with the requirements, including that of proportionality, identified in section 2 of Chapter III and section I of Chapter IV of the Directive. The Supreme Court further made clear that there is no reason why that fee should not be set at a level enabling the authority to recover from the licensed operators the full cost of running and enforcing the licensing scheme, including the costs of enforcement and proceedings against those operating sex shops without licences.

In terms of how such fees may be structured, the Supreme Court considered that it is permissible to provide that an applicant must pay a fee for the costs of the authorisation procedures and formalities on making an application for a licence, and a further fee on the application being successful to cover the costs of the running and enforcement of the licensing scheme (a 'Type A' scheme). However, the Court considered that the situation was more problematic where applications for licences are made on terms that the applicant must pay for the costs of the procedures and formalities on making the application and at the same time, but on the basis that it is refundable if the application is unsuccessful, a further fee to cover the costs of the running and enforcement of the licensing scheme (a 'Type B' scheme). The Supreme Court was concerned as to whether the requirement to make a payment refundable on the failure of an application is a "charge" particularly given that there might sometimes be a cost attached, for example by way or borrowing costs or even loss of interest. The Court considered that the following questions arose:

1. whether the requirement to pay a fee including the second refundable part means, as a matter of law and without more, that the respondents incurred a charge from their applications which was contrary to article 13(2) in so far as it exceeded any cost to Westminster City Council of processing the application, or
2. whether a conclusion that such a requirement should be regarded as involving a charge - or, if it is so to be regarded, a charge exceeding the cost to Westminster City Council of processing the application - depends on the effect of further (and if so what) circumstances, for example: (a) any evidence establishing that the payment of the second refundable part involved or would be likely to involve an applicant in some cost or loss, (b) any saving in the costs to Westminster City Council of processing applications (and so in their non-refundable cost) that would result from requiring an up-front fee consisting of both parts to be paid by all applicants.
   

The Court considered that the position on this point was unclear and that a reference to the ECJ was necessary.

Analysis

It is interesting that the focus of this case has shifted from the permissibility of perimeter enforcement to the way in which licensing fees are structured.  If they have not already done so, authorities may wish to review their existing licensing schemes to identify whether any of their schemes fall within the remit of the Directive and the Regulations, and whether any of the fees levied may fall into the Type B category identified by the Supreme Court. Subject to the decision of the ECJ, and possibly in advance of the decision of the ECJ, authorities may wish to give consideration to the prospect of Type B payment schemes being found to be unlawful, the implications of this and whether anything ought to be done about that now. Authorities may wish to be particularly mindful of the possibility of restitution claims, particularly given that a restitution claim is not a claim for loss, but for recovery of a benefit unjustly gained by a defendant at the expense of the claimant.  The cases suggest that unjust enrichment is considered as at the date of receipt by the defendant. Some cases suggest that restitutionary awards should be reduced to reflect the claimant's loss (which arguably here could be limited to for example, borrowing costs or loss of interest on the "refundable" sum).

If a licensee contacts your authority in respect of previously paid licence fees or if you are unsure about whether a particular licensing scheme is subject to the Directive and 2009 Regulations and the possible implications of an ECJ ruling, we would be happy to provide you with specific advice.

*Iain Miller and Amy Tschobotko acted for the Bar Council and the Law Society in the Supreme Court proceedings.