Please remember that VFR and IFR flights receive the same separation in Class D as they do in class G - none.
Whilst this is indeed the requirement set out in MATS Part 1 (and derived from ICAO Annex 11) it's nowadays a highly dubious procedure. Expecting the flight crew of a high-performance glass-cockpit aircraft operating in complex terminal airspace, often adhering to onerous noise abatement requirements, to adopt a 'see-and-be-seen' technique against VFR traffic is frankly, a nonesense. Add to this the fact that an AIRPROX is filed if either pilot believes his aircraft was endagered by the proximity of another (i.e. it's got nothing to do with separation) and so just because the VFR pilot felt happy with the 'miss distance' if the IFR flight crew were not, the latter will file. In the new safety-aware environment that NATS (the ATS Provider at Solent/SOU) in particular now operates, no sensible ATCO is going to risk this sort of event occurring. Guess this is simply predictable (and understandable) 'defensive controlling'.
...they do not get paid to provide a LARS service by the Governement
anotherthing - just for info., the Government doesn't pay anyone for the provision of LARS. The airlines pay for it through the Eurocontrol Common Charging Scheme whereby a proportion of en-route charges gets siphoned off and handed out to ATS providers who particpate in the LARS Scheme. And the cash received doesn't in any way meet the actual costs of LARS provision which is why places such as NATS at SOU (funded by BAA), EMA, etc., can't justify doing it.