Yup, really.
You never own your registration mark, you effectively lease it.
The DVLA can and will pull a reg plate that has been tampered with to make it look different and then only issue you with a Q mark plate for your vehicle with zero refund regardless of how much you've paid for the personalised plate (IIRC if they receive several complaints about a plate being spaced/made up in a dodgy manner recalling the registration is one of the options).
If however the mistake is there's such as in the case, and the plate is possibly offensive even whilst being fully legally made up (correct font, spacing, no creatively placed wrong colour screw caps), they'll do what they've done in this case.
Which would appear to be recall the registration offer a refund and a standard replacement for the car.
If he doesn't go with it, as Burnsy says they'll probably go for the threat of a Q plate with no refund on his old plate.
I'm not too surprised that some potentially rude/offensive registration plates get past the DVLA at time of issuing, as I suspect the sort of programming that could recognise them all automatically without false positives would probably be very hard to program (not only simple letter substitution, but phonetic letter sub, and mis spelling), so it's probably down to some poor soul to manually check groups of registrations that could be offensive.