Can Betfair do this - Clearly 'yes', albeit unethical

Nothing surprises me when it comes to all bookmakers - they all behave unethically and seem to believe they are above the law. You've been unlucky there

For the avoidance of doubt, where a video assistant referee ruling results in the award of a Material Event (as defined in Part B of these Rules and Regulations above), such Material Event will be deemed to have occurred at the time at which the video assistant referee commences a review relating to such (ultimately awarded) Material Event. In such circumstances, bets matched prior to the time at which the video assistant referee commences a review will not be voided.

If your bet was matched after the review commenced they can.

However, you could argue that the VAR review did not result in the change of card from yellow to red - it was the referee himself who made the change via the monitor, not the VAR. A monitor reviewed decision by the referee is not covered in their rules or by the rule quoted above and the term 'video assistant referee' is not defined in their rules or stated to include reviews by the referee himself via the monitor and the VAR clearly didn't make any review, decision or determination in relation to the colour of the card. You would be technically correct if you argued this, but I wouldn't fancy your chances of them honouring your bet.

Betfair do make mistakes as following a goal i placed a lay bet, the goal was given by the ref then Var got involved but the decision stood then bizarrely Betfair voided my bet following the goal in which i believed they were wrong to do so, i complained they admitted this was done in error and i was refunded what i would have won albeit it was a modest sum.