Factual error: When the allies are testing their joke on the private in the field, just before he starts laughing at it, a bright red car drives past behind him. You can see it in a break in the trees. This sketch is set in WW2, and the car is obviously not from that era.
Revealing mistake: The Italian evening class runs from 7 to 8 PM. The clock at the back of the classroom reads 10 to 2.
Continuity mistake: We are told that the Germans develop and broadcast the "V-Joke" in 1944, but when we cut to Terry Jones and Graham Chapman listening to their radio and hearing the joke, the caption reads "1942...Somewhere in England".
Chosen answer: The song you talk of was originally a poem by William Blake called 'Jerusalem'. It speaks of the possibility of Jesus having visited England. The poem has four verses but you only ever hear the Monty Python boys sing the first one which goes, "And did those feet in ancient time/Walk upon England's mountains green/And was the holy Lamb of God/On England's pleasant pastures seen?" If there's any sort of in-joke connected to it's use, I'm not aware of it. It seemed to just be the standard song/hymn they used when a song was needed that wasn't sketch specific. Some of the sketches it appeared in were 'Salvation Fuzz/Church Police', 'Buying a Bed' and 'The Art Gallery Sketch'. Something that may be relevant, though, is that the only one who was present every time it was sung was Eric Idle. Perhaps he just liked it?