Dude, there's plenty of A1 VW's running rallies these days.  Though, the A2's are a better choice due to the much stiffer chassis.
Engine swaps are legal.  For 2wd cars, the rule is basically, you can put in any engine you want, as long as it's from the same manufacturer of the car.  Then you will run in the Group 2 class.
If you swap in an engine from any other manufactuer, then you have to run in Open class.