From a letter from WPBC to my MP (the full letter is in the above thread).

18 December 2003 Dear Jim

He also refers to the "two in the bar rule" introduced by Section 182 of the Licensing Act 1964, exempting music and singing in licensed premises either solely by reproduction of recorded sound or no more than two performers. The Courts have interpreted this exemption extremely narrowly and in a 2002 decision (case of Sean Toye v Southwark London Borough Council, (extract of which is enclosed) held that even karaoke entertainment necessitated the premises to be licensed. Again, the question of payment for performance was irrelevant to the outcome of this case.

The "extract" - contained the judge's opinion that has been referred to in this thread and was what was being advised by the reference to "Courts have interpreted this exemption extremely narrowly". A narrow interpretaion that the council officers advise to MPs, councillors etc - but now choose to ignore in practice....