Christ on a bike. Why is everyone so precious here!
OP I TOTALLY get where you are coming from!!!!! It's lovely the some of mumsnet have such well behaved friends of their children. Gold stars all round!
I've worked with kids of all ages and I can categorically say that in the real world, loos get messy when kids use them. I have a niece and nephew (who are not feral) and they get wee on the seat and tend to put the taps on full pelt so we end up with splashes up the wall and floor. Inevitable that then a bit of loo roll might get trodden in to make a soggy mess. Multiply that by 12 times and a muddy/ messy bathroom you have! Especially a problem if your bathroom is upstairs too.
We have had big family parties in the garden ( 80 people) and hired toilets because one just isn't enough. I think the problem with the shed is that if a child wees on the floor, it will simply absorb into the wood 
Most people I know wouldn't really give a toss about one evening of using antibacterial handwash though. Ok, it isn't a great substitute for hand washing but plenty of places use it instead of (I'm thinking about hospital corridors/ animal farms and petting zoos etc).
So, on balance you can see that a few people on here would be deeply offended at your toilet set up and lack of proper hand washing facilities. Most people think it's fine. I would go with what a few people have suggested and set it up but tell people "to ease the toilet situation, we have a made a toilet in the shed. You are welcome to use either that or the loo inside". I think that should cover everybody's needs!
I'd love to know what the result is 