As a follow up. While the XP installer refuses to format the partition. I have found that if I let XP partition and attempt a format and fail, I can then power down the VM, connect the vHD to a w7 VM as a secondary disc. Format it with Disk Manager, remove it from the W7, and power up the XP vm again and start the install. Using the "Leave the format as it" type option it then installs without a hitch.
I have no idea why it fails but it seems I am the only one with this issue.
I will go ask this in the IBM forum for my hardware and see if it is related to that.
Dean