Westminster Council wins Supreme Court battle over licensing fees – in part

Westminster City Council has won – in part – its appeal in the landmark Hemming licensing fees case, but the Supreme Court has referred a critical issue to the Court of Justice of the European Union.

The Court’s ruling means that licensing authorities can fund enforcement activities against unlicensed operators through licensing fees. However, depending on the CJEU’s ruling, they might not be able to require applicants for licences to pay a large upfront fee covering these activities – even if refundable – at the time of application.

The case of R (on the application of Hemming (t/a Simply Pleasure Ltd) and others) v Westminster City Council [2015] UKSC 25 concerned Westminster’s approach to licensing sex shops in its area.

Sex shops are required to obtain a licence from the council under schedule 3 of the Local Government (Miscellaneous Provisions) Act 1982. Paragraph 19 of the schedule provides that an applicant for the “grant, renewal or transfer of a licence…shall pay a reasonable fee determined by the appropriate authority”.

Article 13(2) of the Services Directive 2006/123/EC, given domestic effect by regulation 18(4) of the Provision of Services Regulation 2009 SI No 2999, meanwhile provides that the “authorisation procedures and formalities” for applicants “shall not be dissuasive…and any charges which the applicants may incur from their application shall be reasonable and proportionate to the cost of the authorisation procedures in question and shall not exceed the cost of the procedures”.

Westminster has over past years required applicants for sex shop licences to pay with their applications a substantial sum (£29,435 in 2011/12).

This was broken down into a smaller amount (£2,667 in 2011/12) relating to the processing of the application and a larger amount (£26,435 in 2011/12) relating to the cost of administering and enforcing the licensing regime as a whole. The larger amount was refundable whenever an application failed.

The claimant, Mr Hemming, argued that this system was illegitimate under domestic and EU law. His primary case was that there was no basis for requiring successful or unsuccessful applicants to meet the costs of administering and enforcing the regime.

The claimant also developed a secondary case, that there was no basis for requiring such costs to be paid with the applications, even on a refundable basis.

Both the High Court and the Court of Appeal agreed with the claimant’s primary case, holding that such costs had to be funded by an authority such as Westminster out of its general rates or other funds.

Westminster appealed to the Supreme Court, submitting that:

1. Under domestic law, paragraph 19 was wide enough to cover the fees it charged.
2. Under EU law, article 13(2) and regulation 18(4) were concerned only with charges made in respect of authorisation procedures and their cost. The refundable amounts were not a cost of the application but a cost of the application succeeding.
3. Alternatively, if that was wrong, then the “authorisation procedures and formalities” to which article 13(2) refers could be interpreted widely enough to include all aspects of the licensing scheme, including the costs of enforcing the scheme against unlicensed operators, so that the total sum required to be paid with applications can be regarded as a cost of such procedures and formalities.

The Supreme Court allowed the appeal in part but referred to the CJEU in Luxembourg the question of whether it was lawful to require payment of the larger refundable amounts with the applications.

Lord Justice Mance gave the unanimous judgment of the Court. It concluded that:

• Paragraph 19 of schedule 3 enabled a licencing authority to impose on an applicant a fee for the grant or renewal of a licence which covered the running and enforcement costs of the licensing scheme, to be payable either (a) at the time when the licence was granting; or (b) on a refundable basis, at the time when the application was lodged.
• Article 13(2) dealt only with authorisation procedures and fees relating to applications for permission to access or exercise a service activity, such as operating a sex shop. It did not prevent the imposition on those who received licences of proportionate charges to fund the cost of administering and enforcing the licensing regime.
• As to the legitimacy of Westminster’s system, it was helpful to distinguish between two types of scheme. Under Type A, applications for licences are made on terms that the applicant must, upon their application being granted, pay a fee to cover the cost of administering and enforcing the licensing regime. Under Type B, which represented the scheme actually adopted by Westminster, applications for licences are made on terms that the applicant must, at the time of making the application, pay a fee, refundable in the event that the application fails, to cover the cost of administering and enforcing the licensing regime.
• Type A schemes were permissible under regulation 18(4) of the 2009 Regulations and article 13(2), because they permitted a licensing authority to charge a successful applicant with a proportionate part of the cost of administering and enforcing the licensing regime as a whole.
• Whether article 13(2) also permitted Type B schemes was more problematic, because payment was required to be made by every applicant, albeit on a potentially refundable basis, at the time when the application was made. There was no evidence that a Type B scheme could or would have a potentially dissuasive effect upon applicants but it remained unclear whether it involves in law a “charge” incurred from the application, contrary to article 13(2).
• A reference to the Court of Justice was therefore required on whether and when a Type B scheme was consistent with article 13(2). The parties were invited to make proposals on the wording of the question to be referred.

Responding to the judgment, Cllr Nickie Aiken, Westminster’s member for public protection, said: “It is only right that a council should be given the freedom, authority and tools to keep illegal activity off of our streets. This case was about our ability to tackle the unlicensed sex trade, and we are glad the courts have seen it this way.

“We will await the European court ruling on how we collect fees, and adjust our practice wherever we need to do so.”

Philip Kolvin QC, head of Cornerstone Barristers and counsel for Hemming, said: “The Hemming case has shone a clear light on the practice and principles of charging. It has established that fees must be determined by a committee or officer with delegated authority to do so, that they must be kept under review, that both surpluses and deficits are to be carried forward, and that authorities must ring-fence the fees and may not make a profit from the system.

“The decisions in the High Court and the Court of Appeal established that renewal fees could include monitoring and compliance costs. The main issue in the Supreme Court was a narrow one, applying more to Westminster than any other authority, of whether an applicant could be charged the costs of prosecuting those without a licence. The High Court and a unanimous Court of Appeal said no. The Supreme Court said maybe, subject to proportionality, a test upon which it has declined to give any guidance.”

Kolvin claimed that the Supreme Court had given “short shrift” to the council’s argument that it could charge such fees because a prosecution was an authorisation procedure within the meaning of the Services Directive.

He continued: “Westminster also said that it could charge the whole fee – including sums representing prosecution costs – up front, provided that it refunded those sums to losing applicants. The Supreme Court decided that that was sufficiently unclear to require the consideration of the European Court of Justice, a process which will take 18 months or so to complete.

“But the Supreme Court decided that the council could retrospectively set fees on a basis suggested by the Court, that part of the fee was paid up front and the remainder – representing the prosecution costs – were paid on success. In so deciding, the Court has held that, charged in that way, the sum representing the prosecution costs, although charged to a licence applicant, is not a ‘charge incurred from the application’ under the Services Directive.”

Kolvin argued that while that was convenient domestically, since it allowed those professional regulators who intervened in the case to continue charging the professions as before, it was “a linguistic and logical riddle which will take some time to unpick in future litigation both here and in Europe”.

He added that for the Hemming claimants, “the fight for justice must continue.”

Iain Miller, partner at Bevan Brittan who represented the Law Society and the Bar Council on their intervention in the case, said: “Today’s verdict is good news for Westminster and by extension all local authorities. The Supreme Court’s decision moves the debate on so that it is not about the principle of whether you can charge for enforcement – but how you charge for it. To that extent, today’s ruling will come as a big relief to local authorities.

“However, the case will now continue in Europe. While authorities will be happy that the Supreme Court did not find against the principle of funding enforcement through the licensing fee, the way in which the charge is structured and collected is key. Authorities therefore need to review their licensing charge arrangements in the light of this decision and consider whether they need to make changes at this stage.”

Milller added: “This case has potentially far-reaching implications because it applies not only to sex shops. By extension, the principle could stretch to other licenses including pubs and clubs and even professional contexts such as solicitor licensing or other professional services.

“While today’s ruling does not close the case, it is an important step forward for local authorities and establishes a clear principle.”

Philip Kolvin QC led Victoria Wakefield of Brick Court Chambers and Matt Hutchings of Cornerstone Barristers, instructed by Stephen Dillon of Gosschalks.

Nathalie Lieven QC of Landmark Chambers, David Matthias QC of Francis Taylor Building and Jacqueline Lean of Landmark Chambers appeared for Westminster, instructed by its legal services team.

Michael Fordham QC of Blackstone Chambers and Hugh Mercer QC of Essex Court Chambers were instructed by Bevan Brittan to appear for the Law Society and the Bar Council.

Timothy Dutton QC of Fountain Court and Robert O’Donoghue of Brick Court appeared for four regulators, including the Solicitors Regulation Authority and the Bar Standards Board, instructed by Russell-Cooke.

George Peretz QC of Monckton Chambers appeared for the Treasury, instructed by the Government Legal Department.