I'm inclined to believe that it is only the LHR-MUC distance that would count as the delay occurred after arriving in London.

Consider this scenario, if for arguements sake, you had booked PHL-LHR-MUC with say a 20 hour layover in London (so still a legal connection), and then the PHL-LHR flight was delayed by say 15 hours - but still got you into London in time to catch the LHR-MUC flight.

If you considered the PHL-MUC to be a complete flight for the purposes of compensation, then you would not be entitled to any compensation, as you have made the connecting flight, and thus arrived at your final destination on time. If you instead seperated the flights into the 2 parts, then you would be entitled to compensation for the PHL-LHR delay even if you arrived in MUC on time.

Of course in that situation BA would be arguing the reverse of what they currently are and claim that the whole flight matters and that you wouldn't be due compensation (oh and ofc the delay would be because of extraordinary circumstances etc etc )