European Court backs sex shop owners in licensing fee battle with council

Licensing authorities are precluded from requiring applicants for the grant or renewal of authorisation to pay a fee that includes in part the costs of managing and enforcing the relevant scheme, the Court of Justice of the European Union has ruled.

The landmark judgment in Hemming C-316/15 is the latest stage in long-running legal proceedings brought by sex shop owners against upfront charges imposed by Westminster City Council. It is the first licensing case to have reached the CJEU.

The council had charged £29,120 for annual renewal of licences for the shops. Only £2,000 of this sum related to administering the application process. More than £26,000 represented the costs of management and enforcement, including the investigation and prosecution of unlicensed traders.

The case had been referred by the Supreme Court to the CJEU for a preliminary ruling.

The CJEU stated that in order to comply with Article 13(2) of Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market [the Services Directive], the charges referred to must, in the words of that provision, be reasonable and proportionate to the cost of the authorisation procedures and not exceed the cost of those procedures.

“Since the amount of such charges may, in the light of those requirements, in no case exceed the cost of the authorisation procedure in question, it must be examined whether the costs relating to the management and enforcement of the authorisation scheme as a whole may be covered by the concept of the ‘cost of the procedures’,” it said.

“While the Court has not yet had occasion to interpret that concept in the context of the Services Directive, it has clarified, in another context, that in calculating the amount of duties paid by way of fees or dues, the Member States are entitled to take account, not only of the material and salary costs which are directly related to the effecting of the transactions in respect of which they are incurred, but also of the proportion of the overheads of the competent authority which can be attributed to those transactions (judgment of 2 December 1997, Fantask and Others, C‑188/95, EU:C:1997:580, paragraph 30).”

The CJEU noted that in addition, the Court had clarified — “indeed, in relation to a provision of EU law expressly allowing the costs relating to the implementation, management and monitoring of a regime for issuing individual licences to be taken into account in calculating administrative costs” — that the costs taken into account may not include the expenditure linked to the authority in question’s general supervisory activities (see, to that effect, judgment of 19 September 2006, i-21 Germany and Arcor, C‑392/04 and C‑422/04, EU:C:2006:586, paragraphs 34 and 35).

“That consideration applies a fortiori as regards Article 13(2) of the Services Directive which, first, is directed only at the ‘cost of the procedures’ and, secondly, pursues the aim of facilitating access to service activities,” the CJEU.

That aim “would not be served by a requirement to prefinance the costs of the management and enforcement of the authorisation scheme concerned, including, inter alia, the costs of detecting and prosecuting unauthorised activities”.

The CJEU concluded: “Consequently, the answer to the questions referred is that Article 13(2) of the Services Directive must 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 corresponds to the costs relating to the management and enforcement of the authorisation scheme concerned, even if that part is refundable if that application is refused.”

A Westminster City Council spokesperson said: “We are aware of the final judgement from the European court and are assessing what the impact will be in Westminster.”

Philip Kolvin QC, Head of Cornerstone Barristers, who has acted for the sex shop owners throughout the proceedings, said the case was important for all licensing, not just sex shops.

He added: “The Court did not comment on the wider issues raised by the case. However, in his opinion dated 28 July 2016, Advocate General Wathelet questioned the compatibility of the domestic licensing regime with the Services Directive. He cast doubt on whether it was permissible under the Directive to limit the duration of sex shop licences to one year or to charge successful applicants for the cost of investigating and prosecuting unlicensed traders.

“It appears most unlikely that we have heard the final word on these wider issues.”

According to Kolvin, at the time the case was originally brought in the High Court, Westminster charged an annual fee for the renewal of sex shop licences of £29,102 and this fee had since been reduced to £3,288, including enforcement costs.

Westminster has been approached for comment.

The sex shop owners were represented by Philip Kolvin QC, Matt Hutchings of Cornerstone Barristers and Tim Johnston of Brick Court Chambers, instructed by Stephen Dillon of Gosschalks.