Brian Randall happens to be in town this week and of course what does he do when gets to Seattle? -He writes code!
In this case he was writing some code to check the work item policy. From a class library his code was working fine but in a Windows form application the policy object was being returned as null and the Microsoft.TeamFoundation.VersionControl.Client.PolicyExceptionFailure was throwing the fairly unhelpful error:
Internal Error in Work Items
Turns out the answer was to copy the following assembly to the app's appBase folder! - No wonder Brian is my hero!