Hello Jazzo,
I'm afraid I won't be much help, but here is the conclusion to my story.
Optimize was OFF and Desktop & Documents folder was OFF. Inexplicably, iCloud Drive was ON. I don't recall turning it on. Thus, iCloud was trying to sync (Time Machine reported "Time Machine cannot back up because some iCloud Drive files have not finished syncing."). But there was nothing to sync to. We have only one other device on our network, and I am 100% certain I never set it up to sync.
So, with much trepidation, I switched OFF iCloud Drive and received this message: "If you turn off iCloud Drive, all documents stored in iCloud will be removed from this Mac. Options Remove from Mac, Keep a Copy, Cancel." I selected Keep a Copy, even though I didn't have any (visible) files on iCloud Drive.
Then, another message: "iCloud needs to finish updating before being turned off. Your documents will be copied to a folder named iCloud Drive (Archive) in your Home folder on this Mac. Options Cancel, Stop Updating and Turn Off." I chose the later option, iCloud stopped trying to sync, and Time Machine was able finally to back up.
Regarding your issue, which seems quite different, please note that I'm not a specialist, and you should first contact Apple Support.
From the error messages I got trying to sort things out, it seems that Apple has provided ways so that one doesn't lose everything when making changes to iCloud. Because there were TM errors, perhaps you should turn it off for a while, and let iCloud smooth things out. If there are important files currently not in Desktop and Documents, you might move (copy) them there so they will be backed up in the absence of TM. Have you run Disk Utility on the TM drive? You might try a third party app like Drive DX to check overall drive health.
Best of luck.