For those who are interested in the fix for this problem...
The TOOLPATH environment variable was set on Jeroen's machine. MSBuild takes all environment variables and turns them into properties which can be used during the build and by the MSBuild project file. This ToolPath value is used by the WiX project to work out where Candle.exe is. If we have an environment variable called TOOLPATH then this value overrides everything and we get an error since Candle.exe cannot be found. To fix the problem you can do one of two things:
1) Remove the TOOLPATH environment variable.
2) Edit the .wixproj file and remove the Condition check on the ToolPath element.
Change:
<ToolPath Condition=" '$(ToolPath)' == '' ">$(WixToolPath)</ToolPath>
To
<ToolPath>$(WixToolPath)</ToolPath>
I will be updating SharpDevelop so this condition check is removed when new WiX projects are created.