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Licensing fees: the Supreme Court rules

Sex shop iStock 000001196715XSmall 146x219The Supreme Court recently handed down the latest ruling in the long-running battle over the fees payable for licensing sex shops in Westminster. James Goudie QC sets out the judges’ findings.

In R (Hemming) v Westminster City Council (2017) UKSC 50, Supreme Court judgment on 19 July 2017, is a sequel to the Supreme Court’s previous judgment dated 29 April [2015] UKSC 25; [2015] AC 1600. It is written with the benefit of the Court of Justice’s answer dated 16 November 2016 ((Case C-316/15) [2017] PTSR 325) to the question which that judgment referred to the Court of Justice. The appeal concerns fees which were charged to the respondents on applying to Westminster City Council for sex shop licences for the three years ended 31 January 2011, 2012 and 2013 and which included the council’s costs of enforcing the licensing scheme against unlicensed third parties running sex shops (“enforcement costs”). The respondents’ applications all in the event succeeded.

Under domestic law the basis for charging such fees was and is found in paragraph 19 of Schedule 3 to the Local Government (Miscellaneous Provisions) Act 1982 as amended by the Policing and Crime Act 2009, Section 27(7), reading:

“An applicant for the grant, renewal, variation or transfer of a licence under this Schedule shall pay a reasonable fee determined by the appropriate authority.”

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In respect of all years ending on 31 January up to 2010, the council was entitled to determine a reasonable fee which included enforcement costs, and to require this to be paid on application for a sex shop licence, subject to refunding of the part relating to enforcement costs, if the application was not granted.

The position however changed with the coming into force in the United Kingdom with effect from 28 December 2009 of the Provision of Services Regulations 2009 (SI 2009/2999), giving effect domestically to EU Directive 2006/123/EC. The courts below held that, after this change, the only legitimate charges which the Council could levy related to the administrative costs of processing the relevant applications and monitoring compliance with the terms of the licence by licence holders (“processing costs”). The council was not entitled to levy the (considerably larger) parts of the actual charges which related to the costs of enforcing the scheme against non-licence holders.

On that basis, the Court of Appeal ordered the council to determine a reasonable fee excluding enforcement costs for each of the years ended 31 January 2011 and 2012, and to “determine afresh” a reasonable fee excluding enforcement costs for the year ended 31 January 2013. The distinction between “determining”, in the first two years, and “determining afresh”, in the third year, arose because the issues before Keith J covered all years ending 31 January 2007 onwards, and he held by his judgment that the council’s Licensing Sub-Committee had failed to determine any yearly fee after 7 September 2004 (when it determined the fee for the year ended 31 January 2005 and no more) until 5 January 2012 (when it determined the fee for the year ended 31 January 2013). All that had happened in the intervening years was that the council’s officers had simply assumed that the same fee as set on 7 September 2004 continued to apply and had charged licence applicants accordingly.

Pursuant to the Court of Appeal’s order, the council made corresponding repayments totalling £1,189,466 to the licence holders on 28 June 2013, together, it appears, with a further £227,779.15 paid by mistake (since it related to licence holders not party to the present proceedings).

In the Supreme Court’s previous judgment, the Court took a different view from the courts below about the effect of the change worked by the 2009 Regulations giving effect to the EU Directive. They drew a distinction between two types of licensing scheme, as follows:

“Type A: Applications for licences are made on terms that the applicant must pay:

(i)        on making the application, the costs of the authorisation procedures and formalities, and

(ii)       on the application being successful, a further fee to cover the costs of the running and enforcement of the licensing scheme.

Type B: Applications for licences are made on terms that the applicant must pay:

(i)        on making the application, the costs of the authorisation procedures and formalities,

(ii)      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.”

The Supreme Court held that, both under domestic law (paragraph 19 of Schedule 3 to the Local Government (Miscellaneous Provisions) Act 1982) and by reference to EU law (Directive 2006/123/EC, implemented domestically by the Provision of Services Regulations 2009), the council was entitled to operate a scheme of type A in relation to the licensing of sex shops. The Supreme Court referred to the Court of Justice the question whether it was entitled to operate a scheme of type B. The Court of Justice has answered that question in the negative, on the basis that a requirement to pay a fee to cover the costs of running the licensing scheme and enforcing it against unlicensed operators, refundable if the application for a licence fails, constitutes an illegitimate charge in respect of the procedure for authorisation.

In the above circumstances, and despite the Court of Justice’s answer in respect of type B, the council submitted that it is entitled to be paid or repaid the sums which it repaid to sex shop licence holders on 28 June 2013, following the Court of Appeal’s order. The licence holders, on the other hand, submitted that they are entitled to retain the repayment made to them in full, because it was charged in a way for which there was no warrant. The submissions on each side were complicated by reference to principles of unjust enrichment under both domestic and European law.

In the Supreme Court’s view, the correct analysis is simpler than some of the submissions made would suggest. The scheme which the council operated was only defective in so far as it required payment up front at the time of the application. Its invalidity was limited. Contrary to the respondents’ case, European law permits a fee to cover the costs of running and enforcing the licensing scheme becoming due upon the grant of a licence. There is no imperative under European law, as incorporated domestically by the 2009 Regulations, to treat the whole scheme as invalid, rather than to invalidate it to the extent of the inconsistency. Even under purely domestic law principles, a test of substantial severability is appropriate, rather than a rigid insistence on textual severability. Any remaining element of the scheme which can stand by itself is able to do so.

Here, the council was entitled to set and to require payment of a fee including enforcement costs as well as processing costs applicable to all those who, like the licence holders, actually received licences and benefitted by the council’s enforcement action. Although it was wrong to charge the element of this fee relating to enforcement costs conditionally at the time of any licence application, this element was under the scheme due unconditionally once a licence was granted. When the application succeeded, the payment made became due unconditionally.

Even if this were not the right analysis, nothing in the course of events to date can have affected paragraph 19 of Schedule 3 to the 1982 Act, or the council’s right to determine a proper fee under it. Even if there might hypothetically be an exceptional case in which lapse of time and intervening circumstances might make it oppressive to set such a fee, there was no ground to put this case into that category.

It followed that, in so far as the council has determined a reasonable fee, including enforcement costs, there was no answer to the council’s claim to be paid or repaid it now. Before Keith J, it was the licence holders’ case that, if the Court concluded that a fee determined by the council (whether or not it could legitimately include enforcement costs) was unreasonable, the fee would have to be remitted to the council for re-determination of a reasonable fee. Before the Supreme Court, however, the parties agreed that any such re-determination should be undertaken by a Judge of the Administrative Court.

James Goudie QC is a barrister at 11KBW.

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