Legal action over my staffordshire bull terrier (England)?

If what you have said is true the Owner of the Shar Pei should be arrested for not only having the accusations put on you, but for failing to take action during the course of the incident. The cops are probably so far up their own holes that they just arrest the first person accused. You should take a stand because you shouldn't be fined for something so stupid. If what you say is true (and by all accounts, I believe you), then the other dog should be the one being taken away or whatever it is they do with them.