So, to those considering the small claims court route, I would council against it as it would appear it is the incorrect legal process and it may well cost you money.
So what route DO we take? I notice that your letter fails to mention this!
Bottom line - you went to court because you were owed money, you got a judgement in your favour, end of story. The MoD is trying to wriggle out of it on a technicality and to scare people into not taking the same route. I don't see how it's possible for anybody to incur costs to themselves, since bringing a small claims court case is a one-off fee, and the judgement cannot possibly go against you as you are owed the money!
Letters like these are, I believe, referred to in legal circles as "Bluff and Bluster". If, as you say, the matter remains unresolved, I'd take them to court again, this time citing MoD as the defendent. It cannot possibly cost you more than the small claims court fee.
All the bollocks about 'proper procedures not being followed' is simply that - bollocks. You were owed money, they didn't pay it to you, you sued and the court agreed. Internal procedures of any body are irrelevant to the court.
It is painfully obvious that you have been leant on quite heavily to post what is effectively a retraction. Tell them to f**k off, pay you properly, and keep fighting until they do. You have both the legal and moral high ground. Ignore that letter - it is only a solicitor's opinion, and the only opinion that counts is the judge's - and you already have that.