It seems to me to be a very complicated mess.

The first senario should not contravene the current system but it requires a brave licensee to legally challenge councils who do consider (three) customers to be performers in a public entertainment. Whether they are paid or not is strangly currently not a factor but as anyone could claim they were not being paid, our officials don't like to take any chances and prevent everything.

The second senario is public entertainment but specifically exempt as there are two or less performers. Whether the people joining in are performers or not, is not clearly established one way or the other.

The recent TOYE case, has established that it must be the same two performers all performance, if the event is to be considered exempt as two or less performers but not that customers are performers. Although this is suggestive that customers joining in could be considered performers, it is not determinative of the question in law.