Well at last I am making progress!
I have found a way in safe mode php to make a folder which is usable - but it is a little flakey!What I've done is first of all make my uploads folder inside the moodle folder tree - then I have rewritten moodle/files/index.php so that the "mkdir" action calls /moodle/lib/moodlelib.php to make folders (to save doing work twice)
I've put some extra variables in config.php including a safe mode flag I've replaced the make_upload_directory() with code that uses ftp_mkdir()
The great thing about ftp is that when you log in to your own machine you can chose the username - provided you have the password - so folders are made with the correct ownership. Everything else (upload/delete) seems to work fine. The only problem is re-parenting all of the folder paths to adjust for the ftp home folder.
I'm wondering if it is worth putting such a switch in the released version config.php to enable the safe mode workaround. Then the make_upload_directory() function could contain "normal" and "safe via ftp" code, the other change would be to moodle/files/index.php so that it calls make_upload_directory()
I'm happy to submit my code, but I'm not a developer so it probably needs a good seeing to.