Thanks for all the advice and comments, it does help me feel a tad better.
This whole thing is actually starting to affect my health. I'm lying in my nest at night, tossing and turning, thinking about how the hell I can resolve this.
Hours of thinking and quite frankly I'm just going 'round in circles.
I've asked several of my customers what they'd do, and they all say pretty well much the same as you lot tbh.
This garage owner is making me feel like a common and petty crook now, and that does upset me, as joking aside ref. being a scouser, I do at least pride myself with honesty.
I'd never ever stitch someone up with a knowingly duff car, ESPECIALLY one of my oldest customers. What the hell would be the point?

I swore on my kids lives to him that the car was running just fine whan I p/x'd it, but I really don't think he believes me even now.
He claims it couldn't have just gone faulty again by just simply standing on his forecourt for 10 months.
It does seem most odd, but that does appear to be the case. Modern electronics for you I guess?

Meanwhile, I'm in essence being held to ransom and / or blackmailed for my c/q for work carried out. Quite staggering.
However he must know that that will not hold any water in a court of law.
Pirates suggested letter WILL be used, but only as a last resort.