Then pursue that application and ask the council why they won't process it. I suggest you do NOT re-apply - that is precisely what the council wants you to do. It may lend 'credibility' to the idea that you accept that the original application was flawed in some way.
Ask them to put it in writing why they won't process it. Drop into the conversation that you may consider asking the ombudsman about the case.
The process for complaining is through the Local Government Ombudsman in England (similar but differently named bodies do the same job in the regions). See here.
http://www.lgo.org.uk/making-a-complaint/