A Happy New Year for all licensed retailers?

Posted: December 9, 2016

The long-running legal battle that a group of licensed stores have had with Westminster City Council appears to have concluded, and the result should mean that the days of retailers paying exorbitant licence fees are over, regardless of where in the UK they are located.

The European Court of Justice ruled on November 16th 2016 that the process Westminster City Council used to determine licence fees was an infringement of EU legislation, confirming earlier judgements made by the UK courts.

The case began in January 2012, when a group of licensed retailers in the Soho area of London challenged the annual fees charged by Westminster City Council which were, at that time, fixed at £29,102 per annum. Licence fees are supposed to reflect the costs incurred in administering and enforcing them but the retailers argued that Westminster City Council was using the sums it collects from licensed sex shops for other purposes – in effect, profiting from the fees.

The case came to the High Court on 16th May 2012, and it emerged that the annual fee had been set in 2005/6 but the council had failed to determine a fee for any subsequent years, contrary to the Local Government (Miscellaneous Provisions) Act 1982. The council argued that the sum set was a rolling annual fee but Mr Justice Keith disagreed.

The council also said that the majority of the annual licence fee income was spent on prosecuting and closing unlicensed shops. However, Mr Justice Keith decreed that licence fees should only reflect administrative costs, the costs of vetting the applicants and the costs of investigating their compliance – and that the costs of enforcement should come from general funds rather than licensing fees. Accordingly the claimants were entitled to be credited with the enforcement costs for the licensing years 2010-2011, 2011-2012 and 2012-2013. This was expected to be a significant sum as it emerged that the licence fee being charged by Westminster City Council was ten times more than the true cost of administration.

Westminster City Council appealed against the ruling but in May 2013 the Court of Appeal upheld the original High Court judgement. This resulted in Westminster City Council refunding to the claimants the difference between the fees it charged and the fees it should have charged from 2009. The council was also ordered to pay interest at 10% above the Bank of England Base Rate and “indemnity costs” because it rejected an offer to compromise the claim on much better terms at the start of the proceedings. The total cost to the council of the award, the interest, and costs, was estimated to be somewhere in the region of £2 million at the time.

Following Westminster City Council’s appeal being thrown out, a number of other UK councils accepted the judgement as setting a precedent and adjusted their annual fees downwards to reflect the true cost of administering the licence. Later in 2013, ETO conducted a survey of UK councils and discovered that examples of these reductions included: from £9,300 to £5,000; from £3,000 to £1,541.28; from £7,500 to £2,000; and most dramatically, from £5,700 to £495.

But still the case was not over. As the fee the stores had been paying Westminster City Council was essentially in two parts – one reflecting the cost of administration and the other for enforcement – the UK Supreme Court asked the European Court of Justice whether the second part of the fee constituted a ‘charge’ contrary to EU legislation (where the fee exceeds the processing costs).

The case was heard by the European Court of Justice on November 16th 2016 and in its judgement the court said placing a charge on an application would not meet the services directive aim of facilitating access to services, and was therefore unlawful. Under that directive, any charges that applicants incur when submitting a licence application must be reasonable and proportionate to the costs of the authorisation procedure and not exceed them.

Westminster City Council’s annual licence fee is currently less than £2,500 per year. Given the relatively high number of stores it has under its jurisdiction, it would be difficult for other UK councils to justify similar fees. ETO therefore recommends that any licensed store which pays an annual fee which it considers excessive should contact its local council’s licensing department and, with reference to this case, demand to know how that sum is calculated.