Assuming you aren't fussy about keeping the plate yourself, definitely sell it. This chap has clearly sold you a turkey, which you are now stuck with and which will cost you money. The fact that he has the audacity to phone you and demand his number plate back is incredible! He is either very stupid or very cocky; could it be that he didn't initially intend to have it back but since you accepted the car in a poor condition he thought he might try his luck? It's fortunate that the tax disc issue arose or I presume you would have surrendered the plate to him?
Next time he phones, if he does, tell him quite firmly that you have discovered numerous defects with the car, he clearly ripped you off and you have sold the plate in order to recover some of your costs - even if you haven't sold it at that point, tell him that you have so he has no reason to bother you any further. If he carries on tell him to get lost or you'll park the car in his front room!
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