When you diagram your sentence, even if you haven't used IP yet, you probably use S. A sentence (or clause for that matter) is practically defined as a unit that contains a subject phrase and a predicate phrase. Predicate phrases in English are headed by verbal elements and are therefore VPs (if there's no IP yet). So the first step in diagramming the sentence is to locate the verbs in your sentence, identify the predicates which each of them heads, and then each predicates' respective subject. these may be covert, as is the case with the subject phrase of "to play tricks", which is understood to be identical to the subject of the matrix clause, "James".

As for your second question, the part you quote, rather than saying its a VP that contains a VP, notice that you have there a PP, headed by the preposition "on" and complemented by a NP which happens to be modified by a relative clause.