What is the most expensive item I could buy with £50?

Your answer looks right. The instructor made the mistake of assuming the taxable part would be 20% of the total, which is a common mistake with percentages, to forget about what percentages mean. You can see that $40$ is right out, by simply taking $40+.2*40=48$, and that's not 50.

Official UK gov calculation for working out the pre tax value of an item when given the post tax value is

To work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2.

source: https://www.gov.uk/vat-businesses/inclusive-exclusive-prices

50/1.2 = 41.666...

You're pretty clearly correct, unless you've misunderstood how VAT is applied (I'm not familiar with UK finances, so I can't speak to that).

To demonstrate that your instructor is incorrect, simply show that there's a more expensive item that can be bought. In your case, 41 is nicely in between; bigger than his answer, but smaller than yours. 20% of 41 is 8.2. 41 + 8.2 = 49.2 < 50, so you can buy something for 41.