"they thought the wording allowed the UKs" 

That isn't the same as "specifically allowing".

The Council sets the rules, so if the Council says they can, then they can.

The Council said no.  

Think of it in Donald Trump terms - Art of the Deal - Leave Campaign have gone around telling their supporters they hold all the cards and the EU has nothing to play. 

The EU will hand the UK a couple of  small public humiliations and then graciously allow them to put on a fig leaf.