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Private Shop Owners Triumph in Licence Fees Dispute

In a major blow to regulators, owners of licensed sex shops in London’s Soho and Covent Garden districts have convinced the Court of Appeal that Westminster City Council had no lawful authority to add to their licence fees the substantial costs of taking enforcement action against unlicensed operators.

The court’s strict interpretation of the Provision of Services Regulations 2009 will have serious implications for regulatory regimes in a wide range of fields in that local authorities and others will henceforth be confined to collecting licence fees only in respect of the costs of ‘authorisation procedures and formalities’.

Sex shops are required to have licences and to pay a ‘reasonable’ fee for the same under section 2 of the Local Government (Miscellaneous Provisions) Act 1982. Prior the introduction of the regulations, in conformity with the EU Services in the Internal Market Directive 2006, local authorities were entitled to recoup via licence fees the costs of investigating and prosecuting unlicensed operators.

The directive and the regulations required that licence fees charged to those carrying out regulated service activities must not exceed the cost of authorisation procedures and formalities. The owners of 11 sex shops argued successfully at first instance that the costs of enforcement action against unlicensed operators could not be brought within that restricted category.

On appeal, the council argued that the requirements of the directive and regulations should be more broadly interpreted. It was submitted that a ruling in favour of the sex shop owners would ‘critically undermine’ a range of regulatory authorisation regimes, particularly those with no independent source of income save the licence fees levied. It was pointed out that over 90% of the fees historically charged to sex shop owners in Westminster was spent on monitoring compliance and enforcement.

However, in ruling that the first instance judge had correctly interpreted the directive and the regulations, the court noted that their objective was to promote fundamental freedoms and the principles of community law by restricting member states from imposing costs on regulated businesses that go beyond recouping the costs of the authorisation, registration and inspection process.

The court’s decision will have the effect of substantially reducing the licence fees payable by the sex shop owners in future. The council will also have to reimburse them in respect of over-charging in the past, although the method of calculating such sums was altered somewhat in the council’s favour by the court.