While I am by no means a legal/theory expert on this (there are those on here who are, and I welcome correction on any of the following), does the need to draw a distinction not come down to the relatively basic premise that, for the most part, we (as in Western democratic states) do not (or at least until fairly recently did not) on the whole kill people unless a) we are in a state of war with them (i.e. the armed forces of another state/ organised insurgents) or b) they pose an immediate danger to life (e.g. armed police officer confronting an armed suspect, soldier in Ulster with yellow card ROEs) or c) they have gone through a judicial procedure and are executed under due process - in those states with the death penalty.

As above, terrorists engage in illegal, criminal violence for political means and must be treated/punished as such - arrested, convicted and sentenced wherever possible.

Simply using military force against such individuals suggests that you are engaged in some form of 'war' with them, which in turn implies some form of legitimacy on their part to be engaged in said warlike state. Failing to treat them as criminals implies some form of legal or moral equivalency between the state and those it is combating.

Isn't this part of the reason behind the Bush administration's legal and semantic gymnastics - it tried to create a means of detaining suspects as effective POW's without any of the legal niceties while labeling them as terrorists, but denying them the due process this should have entailed.

I realise that in the context of the last 8 years this might all sound a tad naive but does the above make some sense?

While quite correct in what you say, it does not support the concept of why the distinction is useful. Yes, they get nabbed under CT legislation, but if they take to the field in A'Stan, then they are insurgents.
My point on this is that I wonder if this is part of the reason for Davidbfpo's point - that those in policy realms beginning to use COIN-speak and concepts in relation to CT - that the apparently seamless interchange of status between some UK citizens (insurgents/terrorists depending on, as you put it, their immediate geographic context) is leading to a convergence of the COIN/CT approaches/thinking in Whitehall?