Michael Vaughan - High Court declines to rectify contract to prevent tax charge
In (1) MV Promotions Ltd (2) Michael Vaughan v (1) Telegraph Media Group Ltd (2) HMRC  EWHC 1357 (Ch), the High Court declined to exercise its discretion to rectify a provision in a contract for services.
This claim was brought by former England cricket captain and sports pundit, Michael Vaughan and MV Promotions Ltd (MVP), the company through which he provided his services (together, the Claimants). The Claimants brought a claim in which they sought rectification from the Court so as to alter a counterparty to a contract.
In 2008, MVP entered into a contract with Telegraph Media Group Ltd (TMG), under which Mr Vaughan was the named counterparty, and through which his services were to be provided (the 2008 Contract). Following the provision of legal advice and with the agreement of TMG, the contract was amended so as to replace Mr Vaughan with MVP as the named counterparty to the contract. Consequently, the billing and invoicing under the contract took place as between MVP and TMG.
In 2011, the parties sought to extend their agreement, with changes made as to the contract length, level of remuneration and the extent of the services provided (the 2011 Contract). However, the 2011 Contract erroneously referred to Mr Vaughan as the counterparty rather than MVP - the same error which had been rectified in the 2008 Contract.
HMRC issued closure notices increasing the tax payable by Mr Vaughan in relation to the services he provided under the 2011 Contract. As a result, Mr Vaughan, MVP, and TMG entered into a deed of rectification in 2018, under which it was agreed that, on its proper interpretation, the 2011 Contract was intended to be between MVP and TMG.
In the High Court, the Claimants argued that, on a true reading, the 2011 Contract was clearly intended to be between MVP and TMG from its inception and should be read as such. Alternatively, they argued that the naming of Mr Vaughan as a counterparty was a clear mistake which the High Court had discretion to rectify.
High Court judgment
The claim was dismissed.
The Court found that a 'reasonable reader' of the 2011 Contract would understand the following to be true:
a) there was an existing contract between MVP and TMG at the time of the 2011 contractual negotiations;
b) MVP had taken legal advice before entering into the 2008 Contract which resulted in the substitution of itself for Mr Vaughan;
c) this change to the 2008 Contract resulted in payments made pursuant to it being taxable in the hands of MVP;
d) there were clear differences between the wording of the 2008 Contract and the 2011 Contract.
The Court referred to FSHC Group Holdings Ltd v GLAS Trust Corp Ltd  EWCA Civ 1361, in which it was confirmed by the Court of Appeal that before a written contract may be rectified on the basis of a common mistake, it is necessary to show either:
(1) that the document fails to give effect to a prior concluded contract; or
(2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record.
The Court found that, while the reasonable reader in possession of the above knowledge might question the reasons for the change in the counterparty, they would still conclude that Mr Vaughan was the correct counterparty to the 2011 Contract. There was no clear mistake on its face and the Court concluded that the correct parties under the 2011 Contract were Mr Vaughan and TMG.
In the view of the Court, the identification of Mr Vaughan as a counterparty was not rectifiable. Although the intention of the Claimants and TMG was that MVP should enter into the contract, as evidenced by the contemporaneous documents, the Court declined to exercise its discretion to rectify the 2011 Contract. Whilst the deed of rectification had confirmed the true intention and effect of the 2011 Contract, it could not take effect retrospectively, nor could it bind HMRC.
The Court concluded that a lack of any tax-based motive behind the 2011 Contract meant that it would not be appropriate to grant the rectification sought. In its view, there is a clear distinction in the case law between those instances where the parties specifically intended to use a tax-efficient structure when entering into a contract, and cases where no such specific intention exists. In the former case, there would remain a question as to the efficacy of the contract to fulfil its tax motive where HMRC refused to accept the retrospective effect of a post-dated deed of rectification. In the latter situation, which existed in the present case, the Court said that there was nothing left for it to rectify.
Although parties can agree to rectify a bilateral contract to correct a mutual mistake by an amending deed and are bound by the amendment for the entire period, such an amendment may not have retrospective effect for tax purposes beyond the beginning of the tax year in which the amendment is made.
A court order is required to achieve full retrospectivity, but the existence of a mutual mistake is not sufficient to secure rectification (the remedy is discretionary and may be withheld by the Court). If the parties have already entered into a deed to correct the error (as occurred in the present case) the Court may decide not to exercise its discretion to order rectification. It may therefore be preferable to make an application to the Court once an error is discovered, rather than to rectify the error by deed followed by an application to the Court.
The judgment can be viewed here.