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The small claims track is reserved for money claims up to £10,000 in value, not defamation claims. So if you issued a claim in the usual way, it would be transferred to a regional county court and allocated to the multi track (due to the complexity of defamation cases).
Due to the complex nature of these cases it would be recommended that you have a law firm acting for you on a no win no fee basis. I can recommend this one: https://www.samuels-solicitors.co.uk/news/defamation-claims
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Yes as they are under a duty to try and avoid court proceedings so if they ignore the letter then there's nothing to stop you from issuing at court and seeking your costs from them (if you win the case). Their pre-action conduct will be taken in to account when costs are considered. If they have information on you then a request under GDPR would be appropriate - General Data Protection Regulations - if they refuse then the Information Commissioner can fine them (heavily). Let me know if you want further details