That sounds really worrying. I think there is a lot of politics surrounding reading and schools and went through a similar thing with the reading myself.
My DD did really well at her reading in reception. She got on to Purple level by the January and was on gold by the end of reception.
By the time we moved in year 1, she was on white and getting ready for lime. I was told that she was able to read fiction lime but not non fiction. But at the new school, I was told that the teacher had assessed her reading and she was put on turquoise. (A level she read in the first term at reception). I went in and asked if there was a problem with her reading as she had been put back to a level she had read in the first term of reception. They put her up to Purple and then quickly to Gold, and she moved through to white relatively quickly.
She then spent the whole of year 2 on lime, and now she is in year 3, she has suddenly jumped to black. I have no idea what this is, but she has gone from the boring scheme books to reading proper children's stories - things like Clever Polly and the stupid wolf.
As far as I can see, she hasn't had a massive jump in her abilities, she barely read over the summer but there's a huge jump in the type and style of books she is now being given. The only thing I can explain it is the political whims of the teachers.
I think in your situation you would be more than justified in going in to school and asking the teacher whether there is a problem with your child's reading and why he has been put back to books he read in reception. In the mean time, just give him lots of books to read outside of school.
I would also get arsey about his recommendations. If you don't want to complain, you could go in and ask to see his ILP and what they're doing about it?
Sorry, it sounds really shitty.