Expanded memory via USB on TC not working as expected

Hi, I'll try to make this concise.

I'm looking for views/ideas on the following unexpected issue with my Time Capsule.

Objective
To expand the HDD space on my Mac and replicate backup space on my Time Capsule.

What I did
I purchased 2 x 1.5TB external hard drives, one attached to my iMac for storage of media files, 1 attached via USB to the TC to allow for backup of entire iMac + new external Mac drive holding media.

What I did next
Copied existing TC sparsebundle to USB HDD
Copied iTunes library to new external iMac HDD
In Time Machine preferences I changed the backup drive to the USB TC HDD
When all complete, attempted a fresh backup.

Then...
Time Machine claims there is not enough space to do the backup, 400GB required, 200GB available. However Time Machine also states 1.22 of 1.5TB available.

Does anyone have any idea whats going on? Applecare were not much help here, however they did confirm that I SHOULD be able to backup via TM directly to an attached USB HDD on the Time Capsule.

I'd appreciate any views or thoughts you might have. Thank you!