Okay, looking at that picture, it's not quite how I imagined it, but taking it out is still the best thing to do, and if you're not going to, then there's no point in moving the kitchen units to the back wall. You've got a small space that you're trying to maximise into a good living unit, and if you do it properly, then you'll make it more livable, up the value, and make it more salable when the time comes to move. The developer was an idiot to do it the way he did, and you've got the chance to grab a bargain, so why leave the next person to reap the rewards.
As both woody and Freddie seem to agree that you don't need a lobby outside the toilet (which for clartiys sake, we're not recommending you touch at all) then the best conversion it to remove the wall, move the units to the rear wall, and either put a smalll lobby outside the toilet, or not as you wish.
The best covenversion would be to be able to remove the chimney breasts, put a galley kichen opposit the front door, and then no lobby outside the toilet. So what's you're thinking behind keeping it there.