R (on the application of Hemming (t/a Simply Pleasure) & Ors) v Westminster City Council [2017] UKSC 50

Westminster City Council charged sex shop licence applicants fees including enforcement costs against unlicensed operators. Following CJEU's ruling that upfront refundable enforcement charges breached the Services Directive, the Supreme Court held the scheme was only partially invalid and the council could recover enforcement costs from successful licensees.

Facts

Westminster City Council charged fees to applicants for sex shop licences under paragraph 19 of Schedule 3 to the Local Government (Miscellaneous Provisions) Act 1982. Those fees included not only the administrative costs of processing applications and monitoring compliance (“processing costs”) but also the council’s costs of enforcing the licensing scheme against unlicensed third parties (“enforcement costs”). The respondents (“the licence holders”) had paid such fees for the three years ended 31 January 2011, 2012 and 2013, and their applications had all succeeded.

Following the coming into force on 28 December 2009 of the Provision of Services Regulations 2009, which implemented Directive 2006/123/EC, the lawfulness of charging enforcement costs as part of the licence fee was challenged. The Court of Appeal held that only processing costs could lawfully be charged, and ordered the council to determine fees excluding enforcement costs and to repay the difference. The council repaid £1,189,466 to the licence holders on 28 June 2013, together with a further £227,779.15 apparently paid by mistake.

In its earlier judgment ([2015] UKSC 25), the Supreme Court distinguished between two types of scheme: Type A, where enforcement costs are payable only on the application succeeding; and Type B, where they are payable on application but refundable if the application fails. The Supreme Court held a Type A scheme lawful and referred to the Court of Justice the question whether a Type B scheme was lawful. The CJEU (Case C-316/15) answered in the negative: requiring upfront payment of enforcement costs, even if refundable, constituted an illegitimate charge in respect of the authorisation procedure.

Issues

Following the CJEU’s ruling, the Supreme Court had to decide whether the council was entitled to recover (or retain) the enforcement costs element of the fees, given that its scheme had been operated as a Type B scheme contrary to EU law. The licence holders argued that, because the charging mechanism was unlawful, they were entitled to retain the repayments in full. The council argued it was entitled to be repaid the sums refunded.

Arguments

The council contended that its scheme’s defect was confined to the requirement of upfront payment, and that enforcement costs were properly chargeable upon the grant of a licence. The licence holders submitted that the fees had been charged in a manner for which there was no legal warrant, invoking principles of unjust enrichment under domestic and EU law, including Lady & Kid A/S v Skatteministeriet (Case C-398/09).

Judgment

Lord Mance, with whom Lord Neuberger, Lord Reed and Lord Hughes agreed (and with Lord Toulson having indicated agreement before his death), held that the council’s scheme was only defective insofar as it required upfront payment at the time of application. The invalidity was limited and severable. EU law, as incorporated by the 2009 Regulations, did not require the whole scheme to be treated as invalid; only the inconsistent element needed to be invalidated. Reference was made to Edward and Lane on European Union Law and to Director of Public Prosecutions v Hutchinson [1990] 2 AC 783 for the principle of substantial severability.

The council was entitled to set and require payment of a fee including enforcement costs, applicable to those who actually received licences. As stated in the Supreme Court’s previous judgment (para 23):

When the application succeeds, the payment made becomes due unconditionally

For the year ended 31 January 2013, the council had determined fees of £19,973 (new licence) and £18,737 (renewal) on 5 January 2012, including enforcement costs. Following the Court of Appeal’s order, it had repaid the enforcement element; that position was now reversed and the council was entitled to recover those sums, subject to any reduction by the Administrative Court if found unreasonable.

For the years ended 31 January 2011 and 2012, the council had failed to determine annual fees timeously, and the determinations made retrospectively pursuant to the Court of Appeal’s order excluded enforcement costs. The Supreme Court held it must restore the parties to the position they would have occupied had the Court of Appeal reached the same conclusion as the Supreme Court, by ordering repayment of the enforcement costs to the extent reasonable. The question of reasonableness was remitted to the Administrative Court, together with subsidiary issues raised by the licence holders concerning a £116,520 surplus from the year ended 31 January 2005, £80,611 of allegedly unaccounted-for income for 2010 and 2011, and questions of interest on council surpluses.

Implications

The decision confirms that, where a licensing scheme contravenes EU law only in a limited, severable respect, the courts will invalidate only the offending element rather than the entire scheme. Local authorities licensing sex shops (and, by analogy, similar regulated activities falling within the Services Directive) may lawfully recover enforcement costs from successful licensees, provided such costs are payable only on the grant of a licence and not upfront at the application stage. The judgment also illustrates the court’s willingness to use restitutionary reasoning to restore parties to the position they would have been in absent a lower court’s error, and demonstrates the principle of substantial severability in operation in the context of EU-law-derived obligations. The decision is significant for licensing authorities and operators in regulated sectors, clarifying the permissible structure of fees under the Services Directive regime as implemented domestically.

Verdict: Appeal allowed. The Supreme Court held that Westminster City Council was entitled to recover the enforcement costs element of the fees previously repaid to the licence holders, subject to the Administrative Court’s determination of reasonableness, with various ancillary matters remitted to the Administrative Court.

Source: R (on the application of Hemming (t/a Simply Pleasure) & Ors) v Westminster City Council [2017] UKSC 50