Interesting OP
I am a Y1 teacher who has taken 'delivery' of a past student who is now in Y3. She (today) has started morning lessons with my Y1 children as she too has no grasp of phonics, literacy, numeracy skills, no auditory or visual memory skills and overall global development delay. She managed well with my second from bottom group (ELG 6/7) and enjoyed it as she was able to work comfortably within the group.
I would like to point out that I only read your post, nobody else's - so apologies
'Sending' a child back a few year groups is always controversial. The whole child has got to be considered and it (in my view) can only be done with the full support of the parents, the child, the teachers and the senior management. It will never be 100% positive (what ever is?) but the positives MUST outweigh the negatives.
In my case, everyone agreed to it because the child in question lacks maturity that her peers possess and therefore is actually isolated and NOT included in her year group lessons because she needs so much support to access ALL of the curriculum.
If a child cannot read or write, they will struggle with other aspects of the curriculum too (history, geography, ICT, Science etc etc) as she needs these skills to learn. It isn't always a cut and dried case of 'giving her TA support' as TA's are there for the WHOLE class not just one child. It's in their job description. Also, not every class has a full time TA - especially in KS2. If a child has a statement of SEN then usually they have 1:1 support but the number of hours is determined in their 'package'.
I think in the case of going to YR, it can be quite demoralising (certainly if she has good a good social network in her current class and is socially 'sound' - unlike the Y3 child in my class). With 'my' Y3 child, her peers understand that she is immature and has severe learning difficulties so no bullying takes place and she certainly doesn't have the maturity to feel embarrassed by it.
We can all make comments as to what should happen, but without knowing the FULL facts from all quarters and knowing what interventions the school already puts in place and their financial situation, it is difficult to make suggestions.
The only thing I can say is that you meet with senior management to discuss your concerns and have a chat with your child to see how she feels about it. I'm sure there are Y2 children with similar difficulties (most schools always have children who have severe problems with phonics) and therefore maybe it would be okay to suggest a move to Y2 which is only one year behind.
Lastly, I think a different phonics programme may suit her better than what is currently being used. I would also like to point out that phonics still should be 'taught' in Y3 - maybe not discreetly but certainly should not be forgotten.