If I leave scale corners on and scale it down A becomes B and it loses its roundness. If I leave scale corners off I can't scale it at all. I want to reduce the size and also want to keep the round corner as well.
Your shape is rotated 90 degrees so you are trying to "scale" the actual height of the object and not the width- (even though it appears to you on screen as if you are trying to scale the width)- check and you will see a 90 degree rotation and that your width and height values in the lower section of the transform panel are reversed from the way it looks on screen (circled in my screenshot of your transform panel).
The confusion is, the bounding box does not rotate with the shape when you rotate it. It is still trying to scale the width of the shape (which is actually it's height). You cannot do this because the actual width of the shape is already as small as it can go with that rounded rectangle (full round) setting.
Solution is to rotate your shape back to zero (vertical) and then scale it down as you want then rotate it back to how you want it. Or draw a new un-rotated shape and scale it as you think you should be able to. Just un-check the Scale Corners and Scale Strokes and Effects.