The thing about horror in games is that it's very much based on the balance of the conflict and your ability to survive. In a game like Amnesia, you can't actually kill the enemy. The only thing you can do is hide and watch it leave. The game itself isn't particularly hard or scary, because there is no possible chance of overcoming the threat. You can't get an upper hand, and once you've realized that, each encounter loses any punch. Metroid Fusion's encounters with the SA-X come to mind, but when they were put in context of a game whose mode of combat is constant, the player usually thinks they can defeat it at every instance. The game is also not initially set up as a horror game, making the shift in tone more significant.
Take a game where the conflict is easy to overcome: Resident Evil 4. The game's camera and combat mechanics, while fine-tuned and fun to use, help the player kill everything with ease. Ammo is everywhere, health is plentiful, saves aren't limited, you can buy and upgrade an arsenal of guns, the list goes on. Even though the tone is set up to make a horror game, the "escort mission" mechanic gives you something to worry about, and the environment is good for horror, the gameplay doesn't hold that tone together. Any enemy you face can be easily knocked down with a shotgun blast, and running away to taking potshots from across the room is a genuine tactic that works for the majority of the game. You can take damage, sure, but when the game's balance is set up so that taking damage is pointless, that aspect doesn't contribute.
So this imaginary VR game would have to have the balance akin to the first 4 RE games. It shouldn't be an "experience" where all you can do is hide, but have genuine gameplay that lets you fight an enemy. If your only risk is dying, then each death is fairly useless, only setting you back to whenever you saved last. Survival is key, but your state of "living" shouldn't be binary.
Therefore, in a full VR horror game, you would still feel a disconnect whenever you take damage, or when more "gamey" mechanics come into play. The more immersive you make a game, the more tedious it becomes trying to keep it immersive while still maintaining it as a game.
Games are meant to be fun. Horror games are still enjoyable in how they scare you, in the same way one might like a haunted house, or roller coaster ride. But games are also games, not a house to walk through or a ride to sit in. I can still play through a game like Silent Hill and have just as fun, even if I'm not as scared as I was the first time.
My final point is that it would be very easy to make a bad horror game (or at least a bad game in general) with this type of system. If the gameplay makes it so easy the threat is null, then the game is shit. If the threat is so powerful that you become numb to the conflict, then the game is shit. If the balance is not there, any horror will lose bite. If it stops being a game, or embraces the "game" factor too much, it will lose bite.
And besides, if I had full control over myself and a creepy bloodstained grill appears in a dark hallway, I could (and would) run up and punch her in the face. Or maybe take my dick out. What would the game do then? Squirt some bad smells in my nose and give me a game over screen?
