Okay I finally managed to sort it out.
There needs to be an update to files in the original Nexus 4 toolkit to activate the USB debugging.
Originally Posted by mskip on XDA here:
[NEXUS 4 TOOLKIT V1.3.0] Drivers, Backup, Unlock, Root, Flash, Mods + MUCH MORE - Page 100 - xda-developers (post 993)
As many people have found out the older versions of my Toolkits (or adb) won't work with the 4.2.2 update. The device shows as offline as will not connect for any adb operations. The older adb server doesn't include the new authentification method needed to connect. Fortunately the fix is as easy as updating 4 files which I have zipped up and uploaded to my server to make everything easy.
NOTE: The latest Auto Updates for the Toolkits include the new google files so this shouldnt be a problem for anyone who has Auto Updated their Toolkit recently.
1. Download
http://www.skipsoft.net/download/toolkit/New_adb_fastboot_files_for_4.2.2.zip
2. Make sure your Toolkit has been closed correctly with the "x" option in the Main Menu or the adb server will still be running
3. Extract the contents of the zip file above to your Toolkit folder (overwriting the original files)
4. Double click on fastboot-toolkit.exe and adb-toolkit.exe files (a small command box will appear then disappear)
5. Run the Toolkit and when you get to the Main Menu a popup will appear on your device asking to allow USB debugging for your pc
6. Tick 'allways allow from this computer' and click ok to add your pc to the whitelist
7. Select the 'Refresh Main Menu' option in the Toolkit and your device will now show as 'device' and not 'offline'
Hope this helps anyone else that had the issue I had.