A local authority is battling against a controversial ruling that stripped it of the right to use licence fee income to curb illegal sex shops in the capital.
Westminster City Council, backed by 15 other councils from across the country, today launched a Court of Appeal application expected to be of widespread importance.
The council is challenging a High Court declaration that a European directive does not permit the licence fees paid by legitimate sex shop proprietors to include the cost of enforcement against unlicensed shops.
Council chiefs say domestic laws that allowed the use of fees for policing purposes are being overridden by EU legislation in a way that could "open the floodgates for illegal sex shops".
They argue that controlling the sex trade in UK cities "should be a matter for local councils, not Brussels".
Other local authorities fear that, unless Westminster wins its case, public sector enforcement will be hit on many fronts, including the licensing of markets and street trading.
The decision under challenge was made by Mr Justice Keith at London's High Court last May.
Nathalie Lieven QC, appearing for Westminster, told three appeal judges that at the centre of the case was the recent introduction of domestic regulations under the Directive.
They affected fees that could be charged by licensing authorities and other bodies administering licensing regimes throughout England and Wales, said Ms Lieven.
She argued the High Court had erred in law and misinterpreted the Directive by stating that it was not permissible for Westminster Council to recover any enforcement costs through licence fees.
She said the decision ran contrary to well-established principles of licensing law in this country.
Prior to the introduction of the 2009 Provision of Services Regulations under the Directive, reasonable enforcement costs were allowed under the 1982 Local Government (Miscellaneous Provisions) Act.
Ms Lieven told Lord Dyson (Master of the Rolls), Lady Justice Black and Lord Justice Beatson that problems raised by unlicensed sex shops were particularly acute in Westminster as its area included Soho, the centre of London's sex industry.
This had been recognised by Parliament when passing the 1982 Act.
The High Court declaration under challenge had been won by the proprietors of 13 sex shops, of which 11 were in Soho and two in nearby Covent Garden, said Ms Lieven.
Before today's hearing, Westminster's licensing chairman, Cllr Audrey Lewis, said: "If Westminster City Council lose this appeal, then we lose a valuable weapon in our fight to keep our streets safe for residents.
"What is at stake is ensuring the sex industry is well ordered in cities across the country and that the shadowy and illegal side of it - exploitative to its own workers as well as customers - is not allowed to mushroom.
"This has far wider implications for licensing and street trading regimes. It should be deeply concerning to everyone that a common sense domestic law is being overridden by EU legislation.
"Controlling the sex trade in UK cities should be a matter for local councils, not Brussels."