With regard to the OP's post. I also think he's being taken for a ride. Others have already mentioned that there is no connection between rusty discs and water in the brake fluid. With regard to the missing cap, they are NOT hermetically sealed. (They can't be, because the system has to cope with fluid level changes as the brake pads wear). Moisture will therefore enter the system whether there's a cap on the reservoir or not. The cap is simply to prevent spillage. I therefore feel the garage are talking rubbish when they mention water ingress, and agree that he should just get a new cap and change the brake fluid (Which should be done every few years anyway). I find that threatening to appeal against the decision to DVSA usually puts the fear of God into testers who are taking the proverbial.
With regard to driving a car with some remaining MOT but which has just failed, I think the government website is fairly clear, but perhaps not clear enough:
1. You can't drive it if the defect is in the "dangerous" category;
2. You CAN drive it if the defect ISN'T in the "dangerous" category;
3. You can drive on the road provided it is "roadworthy" (i.e. "meets the minimum standards of roadworthiness").
It seems that Points 2 and 3 are contradictory - which they are, but Point 3 applies even if the vehicle has 11 months of MOT left to run and hasn't just failed an MOT. I think it's one of those situations where the government cannot possibly issue advice that says "you can drive an unroadworthy vehicle", so the only pragmatic solution, is to take a "light touch" approach to enforcement. If, for example, I'd failed an MOT on a number plate light and drove it, that's technically illegal, but in the unlikely event of getting stopped, the penalty would be much less than paying for the vehicle to be trailered from one place to another, so it's an easy choice for me to make.