Just to let anyone know when they read this in the archive... :) This seemed to be an account issue.
The VSVN server was running under a default account it created during installation which seemed to have no network rights. However, while it seemed to run fine on that the problem above regarding subfolder security showed up. I decided to try it under another account and arranged for a (non- expiring) domain service account to be created with just AD permissions. I granted it full access to c:\program files\Visual SVN Server and the repository folder (with all subfolders). I then changed service logon and restarted it. The security started working and a few tests seems to show that all is okay now. I've not tried investigating in too much detail, but this might give someone else a few hints! :)
