They will most certainly have "incurred" some costs but I'm struggling to imagine what they did that has cost them £1,000; sure they will have spent time with you leading up to you placing the order but this is not "costs incurred" at all, this is just the normal day to day cost of "selling"; they will spend far more hours with other people who never buy. You went to the next phase of sitting down with the dealer and placing your order and so this is where the "costs incurred" will have come from.
If your buying experience was anything like mine then this is how I'd break it down...
- Initial visit to show room - cost of selling, not costs incurred
- Test drive on a 2nd visit - cost of selling, not costs incurred
- 3rd visit to place order; sat with dealer for maybe an hour while he filled in order form - costs incurred
- Submitting order to VW (electronically I presume) - costs incurred
- A little back and forth "tweaking" my order - costs incurred
So if I were to cancel my order, I'd expect the "costs incurred" to consist of 3 thru 5 above which perhaps amounts to 2 or 3 hours of the salespersons time; a couple of hundred pounds maybe?
Hopefully I don't end up having to cancel my order because they made me pay £2,000 deposit, not £1,000.
Although looking at it another way, if the contract says "cancellation is costs incurred" then working on the textbook definition of what a deposit is then it could actually mean that if you cancel your order then VW have the right to both keep your deposit and also sting you for additional "costs incurred".
If I were in your shoes, I'd do what
@Borris is suggesting above and with a bit of luck they will agree to return your deposit or at least the majority of it.