The Doctor and Jo plan to take a holiday from UNIT at one of the Doctor's many country homes, but when they arrive they find that Iris Wildthyme has invited herself and her companion Tom along for the weekend. The Doctor, at first horrified, switches on the charm when he realises that Iris has arrived in her double-decker bus -- a working TARDIS which he can use to escape his exile. Tom finds the Doctor too smooth and suave to be trustworthy, and begins to hear the voice of a young man in his head, warning him that the Doctor is evil. Meanwhile, Jo admits that she hasn't heard from the Brigadier in some time and is growing worried, and the Doctor eventually agrees to give him a call -- but is unable to get through to UNIT HQ. Instead, he hears a flat, emotionless voice on the telephone line, telling him that a railway carriage has appeared out of thin air in a nearby field. Iris and Tom accompany the Doctor and Jo to the field, where they find the carriage filled with unconscious people in 18th-century clothing. Tom, suffering from a panic attack, flees into the fields, and when Jo pursues him she sees two teenagers dressed in white jumpsuits. Kevin and Martha tell Tom that they are coming for him, and then vanish into thin air...

Still unable to contact UNIT, the Doctor and Iris report the appearance of the carriage to the authorities in the local village of Thisis, where their story is at first regarded as a hoax. Jo goes to the hospital to prepare them for their patients' arrival, and is shocked to see Mike Yates there; he has checked himself in, suffering from amnesia and unsure what he has just escaped from. As Jo watches, Mike's body becomes two-dimensional -- literally becoming a cardboard character. She folds him up and carries him out of the hospital in her handbag to seek help from UNIT, and gets a lift from a friendly troll-like taxi driver who claims to appreciate all that she does to keep him safe. Upon arriving at UNIT, however, Jo finds the building empty, and is confronted by a man in a pinstriped suit who claims that UNIT does not in fact exist; the past two years of her life have all been a hoax intended to disorient her as part of her training. Unable to cope with his claims, Jo flees deeper into the building, where she finds a giant mirror ball which splits open and disgorges murderous robot sheep. As soon as the coast is clear she enters the mirror ball, which shuts up behind her; she forgets her handbag behind, however, and eventually the troll enters the building and collects both it and the cardboard Yates.

The people from the railway carriage are taken to hospital, where one of them awakens, claims that her name is Mrs Bennett, and asks the Doctor to care for her daughters. She and the other passengers then crumble into verdigris, the rust of oxidised copper; all that remains of them are their clothing and the electronic bangles they were wearing. The Doctor takes the bangles back to his house and wires them to his radio, which begins to receive voices reciting incorrect titles of great works of British literature. Meanwhile, Tom is contacted again by Kevin and Marsha, who claim that they and Tom are part of the next stage of human evolution. They tell him to remain with the Doctor and find proof that he is not all he claims, and Tom comes to believe them when he finds a pair of rubber gloves like the hands of a lizard man beneath his bed.

Jo emerges from the Doctor's closet, badly shaken by her experience, but despite Iris' unhelpful contributions the Doctor assures Jo that he and UNIT are indeed real, and that someone is trying to make her think otherwise. He then receives a phone call from the same flat voice, telling him that another railway carriage has materialised on the beach at Great Yarmouth, and he and the others set off to investigate. Tom, however, lags behind to keep an eye on the Doctor from a distance, and is thus the only one who sees a man step out of a funfair ride and gun down an innocent woman and two children. The killer's victims disintegrate into verdigris dust, and the killer descends to the beach, where Jo sees him and greets him as the Brigadier. Now convinced that she and the Doctor are indeed evil, Tom steals Bessie and drives to London, to help Kevin and Marsha stop the Doctor.

One of the passengers on the new carriage awakens and identifies herself as Miss Havisham, the character from "Great Expectations". She tries to flee from the Doctor and Iris, upset that she has not been delivered to the quiet, out-of-the-way house she was promised, and fearing that she will be tortured and dissected if captured by Earth authorities. Iris and the Doctor pursue her, and Iris, noticing that Miss Havisham is also wearing an alien bracelet, tries to remove it -- but accidentally activates it and transports herself, Miss Havisham and the Doctor to a spaceship orbiting the Earth. The ship, which looks exactly like St Pancras railway station, is populated by characters from works of literature, all of whom are preparing to board trains for departure. The Doctor and Iris are spotted as outsiders by Lewis Carroll's White Rabbit, and are thrown into a prison cell by aliens which look just like H.G. Wells' Martians.

Back on the beach, the "Brigadier" removes his mask to reveal that he is the Master in disguise, and that the railway carriage is in fact his TARDIS. He takes Jo to London to meet the Children of Destiny, telepathic and telekinetic youths who believe that they are the next stage of human evolution. Tom has already arrived at the Children's secret base, where their electronic mentor Simon explains that they are working to guide mankind to a better future so they can join the enlightened Galactic Federation; however, their efforts are being undermined by the Doctor, an evil prankster who has been faking evidence of alien invasions in order to frighten humanity and embarrass the true inhabitants of the galaxy. The Master is helping them to lure the evil Doctor into a trap. Tom, however, feels that the Children are too earnest and good to be true, and decides to go along with them for the moment because he fancies Kevin and suspects that Kevin fancies him. The Master -- if indeed this is the real Master -- is satisfied with his progress; soon the Doctor will be driven from Earth, and his mission will be complete.

While trying to cheer the Doctor up, Iris lets slip that she has seen his future, and he desperately inquires when or if he will escape his confinement on 20th-century Earth. Before she can answer they are brought before the alien leader and her husband, Little Red Riding Hood and the Wolf. Red Riding Hood explains that the Meercocks' homeworld was destroyed by the evil Valceans from the Obverse dimension, and that they seek a new home on Earth; however, they made a mistake when they first arrived, and based their new bodies on characters from Earth's fiction. They have therefore introduced the concepts of postmodernism and metafiction to Earth in order to cover up their mistake and make it seem natural that reality and fiction can co-exist. As Red Riding Hood starts to cry, the sympathetic Iris reaches into her handbag for a handkerchief -- and the other Meercocks suddenly take Iris' handbag, claiming that it is their god. The Doctor and Iris are locked up again, but Red Riding Hood releases them, knowing that she will be killed by her people if they discover that the bracelets given to them by the green man do not actually work. The Doctor agrees to take them to an uninhabited world where they can start a new life, but he will require Iris' bus to do so -- and Iris refuses to help, certain that he intends to steal her bus for himself. He storms out to take it anyway, leaving her locked up.

High Councillor Borges of the Galactic Federation contacts the Children of Destiny and warns them that not only are the Doctor and Iris attempting to coerce the evil Meercocks into invading the Earth, but that Iris has kidnapped Federation Ambassador Saldis. Two more Children, Peter and Mary, return from Galactic Federation headquarters, and Tom is shocked to recognise Mary as the girl who will one day become his mother. The Master takes the Children of Destiny to the Doctor's country home to plant evidence of his evil-doing, and although Kevin insists that they are only trying to make the Doctor's actual activities absolutely clear to the authorities of Earth, Peter is upset by this underhanded dealing. Marsha, who has a crush on Borges, searches the grounds for Iris' bus, believing that the kidnapped Saldis will be on board; Mary, who believes that the Master is going to take her away and show her the Universe, accompanies her. Kevin, meanwhile, finishes planting evidence that the Doctor has been conducting evil experiments in his home, and calls the police -- and then, as the final touch, the Master releases a ravenous alien blob in the house and departs, leaving Kevin, Tom and Jo at the monster's mercy.

Bluebeard, the leader of the handbag cultists, takes Iris to their shrine and tries to force her to tell him how she came to possess it. The Wolf arrives and demands to know why the Meercocks have stopped boarding the trains to Earth, and Bluebeard states that they have been betrayed; he and his followers now place their faith in the handbag, one of the ancient gods of his people, and are trying to wake it. As Bluebeard and the Wolf argue, Iris snatches the handbag and flees to the escape pods, where the already somewhat guilty Doctor allows her to board and departs mere moments ahead of the angry mob of cultists. Their escape pod crashes into the cinema in Thisis, where they emerge to find the villagers under attack by the robot sheep which Jo saw emerging from the mirror-ball in the empty UNIT building. As the sheep incinerate innocent villagers with their laser eyes, the Doctor and Iris flee with Sally, the local postmistress, who now believes everything that the Doctor ever told her about himself.

Peter saves Kevin and the others from the blob by using one of the laser guns they had planted in the Doctor's home, but at the moment of its death the blob lashes out and kills Peter as well, to Kevin's horror. The police then arrive and arrest them all while they search the bus. Meanwhile, Mary and Marsha locate Iris' bus and tell the Master -- but he sheds his last disguise and reveals himself to be in truth a supernatural being named Verdigris. Mary and Marsha, shocked, return to the house, only to find that Verdigris has used his power to bring the garden statuary to life; the way in is now blocked by a battling unicorn and griffin. The unicorn destroys the griffin, tramples the stunned policemen to death and then attacks the house -- but before it can kill Kevin and the others, the robot sheep arrive and incinerate it. Kevin uses his telepathic power to shut down the sheep, admitting that he and his fellow Children of Destiny constructed them, intending to frame the Doctor; but they were only supposed to frighten people, not kill them. It is now clear that the Children of Destiny have been horribly misled.

The Doctor, Iris and Sally are attacked by monstrous trees brought to life by Verdigris' powers, and the Doctor sets them alight with fireworks as a distraction -- but it has been a dry summer, and the conflagration spreads quickly. Seeking shelter from the blaze in Iris' bus, they encounter Verdigris, who appears to know both the Doctor and Iris of old. He refuses to tell them what his mission is, only that it will soon be complete, and vanishes conceding that his methods may have been somewhat extreme. Iris pilots her bus to the Doctor's house, where they take Jo, Tom and the surviving Children of Destiny aboard. Iris then flies her bus above the fire, emptying her dimensionally transcendental water tank over it and thus extinguishing it. Only police sergeant Dobbs survives, and he will spend the rest of his life knowing that he was saved from a forest fire and a vicious unicorn statue by evil robot sheep and a flying double-decker bus.

The Doctor and Iris return Sally to the village, and then demand that the Children of Destiny explain themselves. They admit to using their telepathy to convince the staff of UNIT HQ that it does not really exist; Alistair and his men are now running a supermarket a few towns over. The Children now realise that they were misled by Verdigris, but still believe that the alien invasions the Doctor has fought were all faked and that the Galactic Federation really exists. They also accuse Iris of kidnapping Saldis, and although Iris denies having done such a thing, her handbag finally speaks up and identifies itself as the missing Ambassador. Saldis, already furious with Iris for removing him from the Meercock spaceship where he was worshipped as a god, demands that Iris return him to Galactic Federation Supreme Headquarters.

As the bus travels to the Federation, Iris tries to remember why Verdigris appeared so familiar -- but the Doctor thinks she's taking a nap and wakes her before she can remember any details. The bus arrives at the Federation space city, where Saldis has them all arrested, including Kevin and Marsha. The city is not the bastion of peace and harmony that the Children of Destiny were expecting; Saldis appears sadistically gleeful at the thought of his enemies' defeat, and there appear to be torture chambers in the city dungeons. The prisoners are thrown into a cell with the White Rabbit, who claims that Federation envoys arrived from nowhere in his ticket booth and arrested him for organising the Meercock invasion of Earth. He is trying to dig his way out to tell his queen about a deserted world he has heard mentioned here -- a world named Makorna, which he believes the Meercocks can repopulate, and which Iris finds oddly familiar.

Mary and High Councillor Katra attempt to rescue the prisoners, claiming that the Federation is not the haven it once was; in any case, Katra has never liked Saldis, whose people used to travel the galaxy, visiting primitive life forms and pretending to be gods. They are recaptured by the Council's guards, however, and are thrown back into the cell, where the White Rabbit finishes his tunnel -- and finds that Galactic Federation Supreme Headquarters is not in the centre of the galaxy after all, but buried beneath a hollow mountain in Wales. He flees to take his news to the queen, but the Doctor insists upon remaining to reveal the truth about the Federation to the so-called High Councillors. He and his fellow prisoners are brought before the Council, and the Doctor sees that Verdigris is a Council member as well. The other Councillors believe him to be the last surviving native of the dead world Makorna, but the Doctor knows better; he is the being responsible for this entire sham. There is no Galactic Federation; Verdigris has arranged the entire hoax in order to expose and disgrace the Doctor. Verdgris admits that this is true... and reveals that he has been following Iris' orders all along.

The stunned Iris finally recalls her visit to Makorna, a dead world of rusting copper cities where she first heard that the Doctor had been exiled to Earth by the Time Lords. Brimming over with good intentions, and terribly drunk, Iris visited one of the ancient cities and used arcane rituals to summon its spirits, which took their form from the rusting verdigris surrounding them. Thanks to Iris, Verdigris has been attempting all along to free the Doctor from his imprisonment, and has concluded that the Doctor's work for UNIT has been hampering his escape. If aliens are allowed to invade the Earth successfully then eventually a race will bring with them the technology the Doctor needs to restore his memories and repair his TARDIS. The Doctor orders Verdigris to undo the damage he has done, and Verdigris, accepting that things got out of hand, returns the putative Councillors to their real home planets, restores the UNIT staff's memories and Mike Yates' body, and destroys the fake Supreme Headquarters. But he will not stop interfering with the Doctor's life until the Doctor is free; he is bound by his summoning, and must obey.

As life returns to normal for the Brigadier and his men, Iris departs with Tom and the Children of Destiny to make amends for her actions by guiding the Meercocks to Makorna, where they may make a new home for themselves. Meanwhile, Verdigris contacts the Master, who allowed him to borrow his persona in order to torment the Doctor; however, the Master refuses to help him any further, as he has had enough of Earth and has other plans to set in motion on Skaro. Verdigris therefore travels into the Universe of anti-matter, having heard rumours of a being named Omega who may finally be able to free the Doctor from his exile. His plan succeeds, and after the Doctor's next terrifying adventure, the Time Lords rescind his exile; he is free to travel in time and space once again. Verdigris appears to him and Jo one last time to offer his congratulations, and then he disintegrates into a pile of rusted copper; he too is free at last.