R (on the application of Hemming (t/a Simply Pleasure Ltd) & Ors) v Westminster City Council [2015] UKSC 25

Westminster charged sex shop licence applicants a two-part fee, including a refundable element covering enforcement costs against unlicensed operators. The Supreme Court held domestic law permitted this and that EU law allowed type A schemes, but referred the type B refundable scheme to the CJEU.

Facts

Westminster City Council was the licensing authority for sex establishments under Schedule 3 to the Local Government (Miscellaneous Provisions) Act 1982. Applicants for the grant or renewal of a sex shop licence had to pay a fee in two parts: a smaller, non-refundable component for the administration of the application, and a considerably larger component for the management of the licensing regime (including enforcement against unlicensed operators), which was refundable in law if the application was refused. For 2011/12, the total fee was £29,102, of which £26,435 was the refundable component.

The respondents, licensees operating sex shops in Westminster, challenged the lawfulness of the larger fee, arguing it impermissibly required applicants to fund enforcement costs that should fall on the Council’s general funds, and that the costs could only properly benefit successful applicants.

Issues

The central issue was whether it was lawful, under both domestic law (paragraph 19 of Schedule 3 to the 1982 Act) and EU law (Directive 2006/123/EC on services in the internal market, as implemented by the Provision of Services Regulations 2009, particularly regulation 18 and article 13(2)), for Westminster City Council to charge the refundable element of the fee at the application stage.

More particularly: (i) whether paragraph 19 authorised a fee covering the costs of running and enforcing the licensing scheme; (ii) whether article 13(2) of the Directive restricted such charges; and (iii) whether requiring up-front payment of a refundable enforcement-cost fee at the application stage (a “type B” scheme) was compatible with article 13(2).

Arguments

Westminster City Council

The Council argued, first, that “authorisation procedures and formalities” in article 13(2) could be read widely enough to encompass all aspects of the licensing scheme, including enforcement costs. Alternatively, and more narrowly, it argued that article 13(2) only governed charges relating to authorisation procedures and their cost, and that the refundable element related to the running and enforcement of the licensing scheme for the benefit of successful licensees, falling outside article 13(2).

Respondents

The respondents contended that the refundable element was payable on account of enforcement costs unrelated to processing applications and should be borne from general funds. They submitted that article 13(2) caught the requirement to pay the further refundable fee because (i) such a requirement could have a “potentially dissuasive” effect on applicants, and (ii) even a refundable payment constituted a charge exceeding the cost of the authorisation procedures.

Judgment

Domestic law

Lord Mance (with whom the other Justices agreed) held that paragraph 19 of Schedule 3 to the 1982 Act authorises a licensing authority to charge a fee covering not only the processing of applications but also the costs of inspecting premises and “vigilant policing” to detect and prosecute unlicensed operators, following R v Westminster City Council, Ex p Hutton (1985). Such a fee may be made payable either outright on grant of the licence, or on a refundable basis at the time of application.

EU law – article 13(2)

The Court rejected Westminster’s first, wider interpretation. Article 13(2) is concerned only with authorisation procedures and formalities at the stage of seeking permission to access or exercise a service activity, and not with fees payable for the possession, retention or renewal of a licence once authorisation has been granted. This reading was supported by the natural meaning of the provision, the definition of “authorisation scheme” in article 4, the structure of the Directive (sections 2 of Chapter III and Chapter IV treating ongoing regulatory requirements separately), and recitals 39 to 49, including recital 49 which expressly contemplates fees of a supervisory body.

Type A and Type B schemes

Lord Mance identified two possible scheme types. Under a Type A scheme, the applicant pays the authorisation costs on application, and only pays the further enforcement-cost fee if and when the application succeeds. Under a Type B scheme (which Westminster operated), the applicant pays both components up front, with the second component refundable if the application fails.

The Court held that a Type A scheme is plainly compatible with article 13(2). A requirement to pay a licence fee on success does not transform that fee into an authorisation procedure or formality, nor a charge incurred from the application. It remains a licence fee for the possession or retention of the licence.

The compatibility of a Type B scheme was held to be more problematic. The respondents’ “dissuasive effect” argument was rejected on the evidence: there was no factual basis to conclude that the requirement to advance a refundable payment would dissuade applicants. However, on whether the refundable payment constitutes a “charge” exceeding the cost of the procedures, the Court found the answer unclear. It was uncertain whether the requirement to pay a refundable sum is, without more, a charge contrary to article 13(2), or whether this depends on further circumstances such as evidence of actual cost or loss to applicants (e.g. borrowing costs or loss of interest), or savings achieved by Westminster from collecting the fee up front.

New points

Wider objections raised by the respondents based on proportionality, articles 9(1)(c) and 16 of the Directive, and articles 49 and 56 TFEU were not entertained as they had not been raised below.

Implications

The decision confirms, as a matter of domestic law, that licensing authorities under paragraph 19 of Schedule 3 to the 1982 Act may set fees to recover the full cost of running and enforcing a licensing scheme, including the cost of enforcement against unlicensed operators.

As a matter of EU law, the judgment establishes that article 13(2) of the Services Directive (and regulation 18 of the 2009 Regulations) applies only to charges connected with authorisation procedures and formalities, not to ongoing licence fees payable for the possession or retention of a licence. Such ongoing fees may lawfully be set at a level enabling recovery of the full cost of running and enforcing the scheme, subject to the requirements (including proportionality) set out in section 2 of Chapter III and section 1 of Chapter IV of the Directive.

The decision is significant for licensing and regulatory bodies generally – reflected in interventions by HM Treasury, the Law Society, the Bar Council, the SRA, the BSB, the ARB, the Farriers Registration Council and the Local Government Association – because it preserves the ability of such bodies to fund enforcement against unauthorised operators out of fees paid by licensed operators, rather than from general funds (which many regulators do not possess).

However, the lawfulness under EU law of requiring all applicants to advance a refundable enforcement-cost fee at the application stage (the Type B scheme) remains unresolved and was referred to the Court of Justice. The Court declared that a Type A scheme is compatible with regulation 18 and article 13(2), but the wider question awaits the CJEU’s ruling.

Verdict: Westminster City Council’s appeal succeeded to the extent of obtaining a declaration that a Type A scheme (where the enforcement-cost fee is payable only upon a successful application) is consistent with regulation 18 of the Provision of Services Regulations 2009 and article 13(2) of Directive 2006/123/EC. The question whether a Type B scheme (requiring an up-front refundable payment at the application stage) is compatible with article 13(2) was referred to the Court of Justice of the European Union.

Source: R (on the application of Hemming (t/a Simply Pleasure Ltd) & Ors) v Westminster City Council [2015] UKSC 25