Around the turn of the millennium, an Edinburgh photographer bought the old Co-op grocery on Royal Park Terrace and set about converting it into a home.

The conversion was stylish and roomy, cleverly laid out over two floors with metal staircases and double-height ceilings. The basement was low and damp but the photographer's musician friends – the likes of Shooglenifty and Salsa Celtica – didn't turn up their noses at a free space to rehearse. One day someone suggested holding a little concert among friends in the open-plan living room.

Fast-forward ten years and Douglas Robertson's house concerts have become an essential fixture of Edinburgh's folk and jazz scene. For audiences it's a rare find: a cosy, homey atmosphere, a cute terrier padding about, a chance to hear live music without someone ordering six pints of Tenants in your ear. It doesn't all come free – you're encouraged to pop a tenner into a hat during the show – but the money you spend goes directly to the musicians. Up to 80 people cosied in for Michael Marra, Aidan O'Rourke and Moishe's Bagel. In 2012 Robertson and his girlfriend Jane-Ann Purdy hosted 105 concerts. Purdy, a web designer and digital media specialist, designed a website and regular newsletters to keep up with demand.

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The formula worked because Robertson was willing to cough up basic costs himself. Sending out a newsletter costs £20 a pop; he's spent £5000-£6000 on equipment over the years, goes through inordinate amounts of toilet roll, makes soup for the musicians before they play and generally shares a whisky with them afterwards. "But it's worth it," he says. "These gigs are my hobby. If I was into skiing I'd spend easily as much but I wouldn't get to meet fabulous musicians from all over the world."

There are deeper concerns at play here, too. Robertson has enough pals in the music industry to know just how paltry the pay can be. (A recent report from the Musicians' Union found that more than half of professional musicians earn less than £20,000 a year – a figure many musicians consider to be optimistic). "And in the last few years there's been a venue massacre in Edinburgh," Robertson says. "Cafe Graffiti is now a conference centre. The Venue is now a gallery. La Belle Angel burned down. The Roxy Art House and Forest Cafe went bust along with Edinburgh University Settlement. The Lot is lying empty."

Combine these factors and the success of the house concerts isn't so surprising. Things were going swimmingly until one evening a couple of months ago when, just as American singer Michelle Shocked finished the last tune of her set, Robertson felt a tap on his shoulder. Men from Edinburgh Council were at the door. In the following weeks the city's planning department informed him that somebody had lodged a formal complaint; the gigs would have to stop by December 31.

The issue is not about noise. Alex Lunn, ward councillor for Craigentinny and Duddingston, says he has not received a single noise complaint in the nearly 10 years Robertson has been hosting the events. Robertson says he's acutely considerate of his neighbours: he makes sure music stops by 11, keeps speaker volumes low and asks guests to leave quietly. "The people who come here aren't exactly hooligans," he says. "They've come to listen to music in a quiet and intimate context. They're the opposite of drunken revellers."

The issue is to do with labelling. Edinburgh Council alleges that Robertson is using his house as a public venue. Venues need commercial licensing, and Royal Park Terrace is zoned as a residential area. "We understand that the concerts play an important role in the city's live music scene," says Council media representative Mike Pinkerton. "But somebody has lodged a formal complaint and we can't turn a blind eye to it just because Douglas's concerts are popular. It would be unfair practice if we didn't follow standard procedures, and we'd be liable to be taken to the ombudsman."

So when is a home not a home? Robertson points to the toothbrushes in the bathroom, the veggies in the kitchen, the beds in the bedrooms and little Colin the dog sprawled out on the rug as proof that he and Purdy sleep, eat and live at the house. The Council doesn't dispute that – but does suggests that the number of strangers who come to the concerts constitutes a "change of use".

"And that is crazy," says Robertson. "Anyone who throws a party won't necessarily know everyone who comes. Friends bring their friends and everyone makes new acquaintances. What we're having here is effectively a private event. I may be a complete nutcase to invite so many people into my house but that's for me and a psychiatrist to deal with, not the council." Other private concerts and happenings go on in Edinburgh, of course, but tend to keep their profiles below the council's radar. Robertson's slick website and newsletters tested their luck.

What happens next is unclear. Robertson has the right to launch an appeal, and from there the process jumps through several hoops before he faces any criminal charges for hosting concerts after the December 31 ultimatum. In the meantime he has his mind on bigger things. He wants to start a venue – an official venue – that would become a "live music centre for Scotland". His vision includes rehearsal rooms, recording studios, cafes, maybe even accommodation, all under one roof. The artist-led charity that would run it, Sound House, is already in its formative stages.

"In almost every other country it would be easier to make this happen. In Amsterdam a gas works can close down and in no time there's a cafe in one part, a make-shift cinema in another, a nursery in another. They've got a kind of 'why-not?' attitude there, while here the default answer is no. Edinburgh has fantastic musicians living here but apart from August it's bereft of venues. It's festival city for one month of the year. The rest of the time we twiddle our thumbs and look for a gig."

The council say they want to help Robertson realise his proposal and have met him to discuss partnership options. Robertson says the options they offered – one suggestion was the bar of the Usher Hall for £800 per night – "failed completely to understand the point." He's willing to meet the rules and regulations that come with setting up a formal venue, he says, "given it's the right venue. We'll make this happen despite the bureaucracy." At the time of writing, negotiations continue.