I always assumed it was just a shock-value thing, much like the Sex Pistols running around wearing Nazi regalia and acting like assholes -- rejection of and rebellion against the conventional values of the time.

As far as I know the Damned weren't known for being gay or particularly gay-affiliated, but Captain Sensible (the bass player) was notorious for performing in drag and being "outrageous" in general. As far as "Jet Boy Jet Girl" goes, it just so happens that it was originally recorded by Captain Sensible (go figure) with another band (I forget what they were called) during a period when the Damned had temporarily broken up.