In the UK and under a radar control service I must seek to achieve the required minima against unknown traffic, even if the aircraft concerned reports the unknown traffic in sight. It is accepted that the minima may not be achieved against an unknown aircraft but all reasonable endeavours shall be made. We can use vertical if the mode C is showing, verified or not, but have to have 5000 feet and in the case of unverified mode C the radar returns must not merge.
Incidentally, I don't think you can change the mode C output of the transponder as it is encoded from a pressure of 1013 mbar/hectopascal regardless of the pressure set on your altimeter. (Admittedly it may be malfunctioning, hence the verification checks.) Below the transition level, my radar makes the necessary calculations based on our QNH to convert the displayed level into an altitude. This is displayed as e.g. A030 and for a flight level it will show e.g. F140. If you don't have mode C it shows ???? where the level would normally be.
Edit: Talkdownman can obviously type faster than me!