The solution was very simple and I found the answer in this post about ubuntu and apache. Basically, AllowOverride is set to None for both / and /var/www/ by default on ubuntu, which is nice and secure but it caught me out on this occasion. Change the settings to AllowOverride All and create a symlink in mods-enabled to mods-available/rewrite.conf and restart apache - everything should then start playing nicely.
I just spent a couple of days, on and off, fiddling with my apache setup on a kubuntu box. I had a site with some very weird and scary rewrite rules which I needed to do some development work with and I just could not get the site to work!