Council faces £2m bill after losing landmark appeal on funding regulation

The judgment is predicted to have a huge impact on the funding of regulation. The local authority meanwhile warned that the ruling could mean a “free-for-all for the sex industry”.

The case of R (Hemming & Others) v Westminster City Council centred on the charges levied on sex shop owners in the West End for their annual licence.

Westminster has charged owners £29,102 since 2005, using the funds in part to clamp down on illegal shops.

However, on 28 December 2009 the Provision of Services Regulations 2009 transposed into UK law the European Services Directive 206/123/EC.

Regulation 18(4) states that any charges provided for by a competent authority which applicants may incur under an authorisation scheme must be reasonable and proportionate to the cost of the procedures and formalities under the scheme and must not exceed the cost of those procedures and formalities.

Seven shop owners, represented by Philip Kolvin QC of Cornerstone Barristers, argued that Westminster could charge at most 10% of the fee it was charging.

In May 2012 Mr Justice Keith ruled in the High Court in favour of the owners.

The local authority took the case to the Court of Appeal, arguing that its fees were unaffected by the new laws.

However, the Court of Appeal has today upheld the High Court’s ruling. Westminster will now have to pay the vast majority of fees from the beginning of 2010.

The council has also been ordered to:

• recalculate fees as far back as 2004 after deficiencies were found in its procedures for determining them;
• pay interest at 10% above the Bank of England base rate;
• pay indemnity costs after it rejected an offer to settle on better terms at the start of proceedings.

Philip Kolvin QC said: “The judgment has important consequences for the funding of regulation in the UK because the new laws apply to all forms of authorisation to provide service activities. These include all forms of licensing (except for gambling and taxis which are excluded), street trading, subscriptions payable by professions including the legal professions in order to be able to practise and even the fees for planning applications.

“Most importantly, the judgment will limit the scope of fees which licensing authorities will be able to charge under the Licensing Act 2003, following the right to determine fees introduced by the Police Reform and Social Responsibility Act 2011. The Home Office has delayed introducing Regulations implementing the legislation, it is thought in order to enable it to consider the Hemming judgment.”

The Court of Appeal refused Westminster leave to appeal to the Supreme Court, but the local authority said it would apply direct.

Cllr Nickie Aiken, Westminster City Council’s cabinet member for Public Protection and Premises, claimed that the Court of Appeal decision would mean a "free-for-all for the sex industry".

She added: “This is not what we wanted, this is not what the Government wanted and it is not what the taxpayer will want. Soho's reputation and central location means Westminster has more sex shops than anywhere in the country. It is a unique problem, totally unlike any other area in the UK. And clamping down on the unlicensed shops costs a lot of officer time and money.

"This ruling, using EU law, will open the floodgates for illegal sex shops and we will no longer have the resources to deal with them.”

Cllr Aiken said that Westminster had closed down down 68 illegal sex shops since 1999. Action was being taken to close the seven such establishments that are left.

"All the money from the licence fees was spent on policing the industry,” she said. “That, in itself, helps the licensed trade. It is manifestly unfair that this must now be picked up by the taxpayer - who in all honesty would be unlikely to want this sort of shop at all."