I'd agree fully with your interpretation, sw101, but I can see how the Regs might cause confusion to the uninitiated. Though to clarify, even if the extension is partly submerged rather than built on the ground level, it still qualifies as ground level, so anything above it is 'first floor'.
To be fair to John, I don't think he's trying to subvert the Regs. It sounds like he's just trying to resolve a problematic situation.
However, I also wondered recently where this sudden rash of calls for planning advice came from. I wonder if local authorities aren't directing tricky cases to the sages at archiseek?
As you've probably seen from my posts to other similar threads, I'm directing people to planning consultants. I don't think advice given off the tops of our heads is any replacement for a proper case analysis, and I'd stress that again. I don't intend to dole out free advice forever as I've many other things to be getting on with. And to be fair to local authorities, they have improved greatly in this type of thing themselves.