Given sufficient political will, money of that magnitude can indeed be found --- after all, the Government seems to find it remarkably easy to fritter away billions on things which are either largely pointless or actively offensive. If we had £500M (which we don't), I would argue there are better, more efficient, more rewarding ways of spending it on UK space than extending the ISS.
It's Too Late
The Hempsell plan envisions spending £530M over five or six years to 2015 developing and launching the HEM. Assuming the HEM comes online in 2014 or 2015, that leaves very little time until the projected decommissioning date of the ISS in 2016. We would be spending half a billion pounds on a facility which would see relatively little actual use. Now, it's quite possible that the ISS decommissioning date will be stretched until 2020 or beyond, but if that happens NASA will be suffering a budgetary train wreck on its plans to return to the Moon, with negative impacts throughout the agency.
There are Better Things to Do... like the Laundry
Hempsell bemoans prolonged lack of investment in UK space in general, and UK manned spaceflight in particular. So do I. However, it's possible in one (admittedly perverse) way to regard this previous neglect as an advantage. If we have significant new money going into UK space, we're effectively starting from a blank sheet of paper, unconstrained by previous expensive long-term commitments. We can be as fresh, imaginative and creative as we like. Bolting on an astronauts' lounge on the ISS is emphatically NOT fresh and imaginative. It's a habitat module. Habitat modules have been done. You will shortly be able to buy habitat modules commercially off the shelf (more of which later). Frankly, the word which springs to mind is "boring".
So, what can we do which isn't boring? What real and useful contributions can we make to space development? It turns out that there are many areas of technology which are absolutely crucial for sustained human expansion into space, and which are crying out for investment. Jonathan Goff of Masten Space Systems discusses this at length, compiling what he terms the 'Laundry List'. The following is adapted with apologies from Jonathan's original list:-
The Laundry List: essential space technologies
Fully Reusable Launch Vehicles (RLVs)
More efficient propulsion systems (e.g. Air-breathing Rockets)
Low-maintenance reusable thermal protection systems
Propellant depots/on-orbit spacecraft refuelling
On-orbit assembly and construction
Low-maintenance space nuclear power
In-Situ Resource Utilisation
Artificial Gravity, and bioscience of partial gravity
Tethers (momentum exchange and electrodynamic)
Many of these can be usefully studied and advanced with small-to-medium-sized projects, making use of low-cost launch (e.g. SpaceX Falcon 1) where required. For instance, I have it on very good authority that the SABRE air-breathing engine can be brought to subscale flight test for very much less than £500M.
If the UK can make real and substantive progress in these areas, we could have an impact on future space development far in excess of the size of the original investment. We have the potential to set global technical and engineering standards for space systems, in the same way that the majority of railways around the world were originally based on British innovation and were built to a British standard gauge.
A British Space Station?
Hempsell wants to see British astronauts living and working in orbit. So do I. However, as a British taxpayer, I want to see that happen as efficiently as possible. I want to see more British astronauts, flying more times, doing more science for less overall cost. In my opinion, we are more likely to accomplish that by fully embracing commercial spaceflight than by adding to the ISS. In April 2007, Bigelow Aerospace announced their price schedule for their projected series of commercial space stations. A full-scale module, with 300 cubic metres of volume, would cost $88 million a year or $7.9 million a month to lease; half a module would cost $54 million a year or $4.5 million a month. The United Kingdom could effectively have its own station for £50M/year plus crew/cargo transportation costs. This facility could be sub-let to commercial or international partners, and may just conceivably even run at a net profit.
The argument will be made that buying existing modules 'off the shelf' would not benefit the UK aerospace engineering base. I would ask UK engineers to look actively at ways to enhance Bigelow stations, designing cheap and effective plugin modules for supplementary power, extended life support, expanded docking facilities, external cargo carriers, etc. etc. They will be creating products with a market. All being well, there will be more than one Bigelow station. The same cannot be said for the ISS.
If the UK aerospace community needs a single 'big idea' to work towards, they could look at designing, developing and deploying a modified Nautilus-class Bigelow module with a robust tether and counterweight system, which can produce artificial gravity under spin. This would allow bioscience research on the effects of prolonged exposure to partial gravity, exploring the regime from milligravities (asteroids) to 1/3rd Earth gravity (Martian surface). This research is absolutely crucial to continued human expansion into space, and to proceed to Lunar bases or Mars flights without it would be frankly irresponsible. It's also work which is effectively impossible to do on the ISS due to the way it's constructed. ISS advocates claim that exclusion from the ISS science programme will cripple UK space science. On the contrary, if the UK has useful data on partial gravity bioscience, then the world will beat a path to our door.
This spin gravity research facility could (and indeed should) be operated as an international partnership. In my opinion, we should look first towards our Commonwealth partners, with particular emphasis on India, as they are now actively investing in manned spaceflight development.
I even have a pet name for the station :-) I call it 'Island Zero', as a homage to the space colony concept 'Island One' by Gerard O'Neill which employed spin gravity, and as a tribute to a certain small island, where once upon a time people used to dream big dreams, and then set out to make them come true...