Well it turns out the turbo has blown. Cracked in half to be precise.
The first photo shows where the turbo housing cracked, where the two parts join. The soot marks are clear, so it has been cracked and blowing for a while, before catastrophic failure. The two parts are now not in alignment, and therefore (as you can see in the second photo) the shaft and housing are not aligned and the impeller is rubbing against the housing.
The impeller rubbing against the housing is what's making the 'hoot' noise (it didn't sound metallic when driving).
Next step is trying to get the warranty company (WMS Group / VGS) to pay up. So far they have asked for the turbo for inspection. I want to get driving so I've said that I will buy at risk, if they tell me how much they will pay. They aren't being very forthcoming with this figure, but apparently they only give reconditioned turbos (if these exist for k04), or pay the equivalent towards the claim.
This warranty company have clearly got teflon shoulders, and have already wound up the garage owner trying to convince him that it's 'probably wear and tear due to carbon build up, which is common with VW turbos'. It's a petrol engine you morons!
A new K04 from Borg Warner is about £1000. The second hand K04s from Alex are £400, so these are the options at the moment. I don't like the sound of a reconditioned one.