sell some very reasonable studio mikes etc... in fact I noticed that this month's flyer is offering a studio vocal condenser mic for £20.00!!! P+P is about £15 whatever you buy or how much you buy (see if your mates want anything at the same time) and no import duty or VAT to be added on arrival!
For your £500 you should be able to get a nice little set-up that will give you a master capable of reproducing pro-cd pressings.
Try and make sure the recorder you get can record at a high quality (above CD quality) then any effect etc you use during processing will work better then drop the quality to CD when you make your master.
Try and "add" a analogue stage to add warmth to the recording - digital is a "little" to bright for most peoples ears.
accept the fact that whatever you buy will be out-of-date and worth a lot less than you paid for it buy the time you've unwrapped it!
Have fun - and don't forget the January sales are around the corner...