I have to say that it was a pretty silly way of going about it. I suspect that it's far too big to come under "Permitted Development" for an outbuilding. It may well might have been allowable as an extension.
It depends on its dimensions amongst other things. Also, whether it's in a Conservation Area. If the house had merely been extended, then permitted dimensions might have given them the space they needed.
Even if it didn't come under "PD", then an application for a "granny annexe" might well have been allowed under a normal Planning Application.
Any Planning problems can usually be regularised retrospectively. Building Regulations is a much more serious problem. If he built that lot without the usual inspections etc, then, quite honestly, he's a prat.
Council tax is largely academic. Tax for a separate dwelling isn't going to happen since there is not likely to be Permission given for a stand-alone dwelling.
Council Tax with an extension or annexe will simply be higher to take account of the increased amenities.