Has any merchant had experience with this? I expect it would be hard to claim back VAT on a purchase made in Bitcoin?
If you're a merchant, you need to put the VAT into the invoice regardless of how you get paid by the customer (unless you're exporting outside of the EU): see http://www.hmrc.gov.uk/vat/managing/international/foreign-currency.htm
(for foreign currencies) and http://www.hmrc.gov.uk/vat/managing/special-situations/samples.htm
(for barter). So the legal status of Bitcoin does not affect the amount you're charging, it's the same as if using pounds or euros. The first link says that merchant needs to list the amount (net/VAT/gross) denominated in pounds on the invoice anyway.
If two VAT-registered companies are trading among themselves with Bitcoin, this is a bit more problematic. In other EU countries you do not need to charge VAT in this case, you just list the other party's VAT number on the invoice. Looking at the HMRC website, in UK it does not seem to be an option, only in specific cases. So you should charge VAT in this case, and the other party, if VAT registered, should be able to claim it back. Again, the units for calculation will be pounds and not bitcoins.
PS. I'm not a lawyer nor a certified accountant, but I've been researching Bitcoin and have some practical experience with EU invoicing / VAT.