Hello there. I can see that this problem is causing much trouble and taking up a lot of time. It would appear that you are at the issuing a Letter Before Claim point. I see that you are are aware of the relevant Pre-Action Protocol.
To deal with your specific questions:
1. There are some costs implications, even in the small claims Court. These tend to be fees (Court fees or other experts' fees). Also, people are entitled to claim for their costs and time (such as lost earnings to attend Court). These costs do not include standard legal costs charged by a solicitor;
2. Timing - due to the service of the notice from the garage, I think you have no alternative but to issue the claim rather than go the Ombudsman Route. Plus, if you open an Ombudsman Claim the Court could very likely stay (pause) the case to await the Ombudsman's outome.
3. Storage fees. Yes, they can charge reasonable storage fees. They are doing this on the basis of being allowed to by the law - The Torts and Interference with Goods Act - not on the basis of any contract. At this point in time I think strategically it is better that your car remains with them rather than taking it back as this strengthens your claim. However, I can see that this means they could counterclaim for the charges in the Small Claims Court. You could include some reference to the Torts Notice in your Pre-action letter, something like "your claim for storage charges is rejected in its entirety given that the car has been returned to you for the reasons outlined in this letter".
I trust these answers have been of help. If not, do let me know.