Thanks, Purplecabbage. I was using PhoneGap 2.7.0. Deleting the plugins causes many errors when trying to build, but I hadn't tried it your way (with the project closed from Windows explorer). Though I have found another solution:
If you build for WP8, whatever you specify as a capability in the WMAppManifest file is reflected in the market place - so that works fine.
However, if your app is for WP7.1, the market place ignores the WMAppManifest file, analyses your XAP and states that you require all capabilities. This happens regardless of whether you use the standalone or full package in PhoneGap 2.7.0. To solve this I used PhoneGap 1.9.0 and followed the Sociable Geek's instructions here:
http://thesociablegeek.com/phone-gap-tutorial/phone-gap-tutorial-3-reducing-the-load/In order to have two XAPs for the same app (an old one compatible with WP7.1 using PhoneGap 1.9.0 and a new one compatible with WP8 only using PhoneGap 2.7.0) I followed the instructions here:
http://blogs.windows.com/windows_phone/b/wpdev/archive/2013/01/15/app-submission-tips-for-windows-phone-7-and-windows-phone-8.aspxReally I don't need two and could just use PhoneGap 1.9.0 because apps made for WP7.1 run on WP8 too, but I don't like the idea of being out of date!
For anyone who needs the features of PhoneGap 2.7.0, it seems that the only solution is to produce one XAP for WP7.1 which will have all the (off-putting) requirements/capabilities and one XAP for WP8 in which you can specify the capabilities you need. That way at least you provide for both platforms and keep the WP8 users happy by not threatening their privacy.
Interestingly PhoneGap build is affected as it builds for WP7.1.
I hope this helps someone else. It took me many hours of searching the internet and racking my brains to come up with this hybrid solution.
Jonathan