James! I'm following your build with a smile on my face! Great progress and it looks really good!
I've done two 111:s in the 1980's, one was a Matchbox (I went for the Romanian option), the other one was Italeri's kit that I did as a torpedo bomber in North Africa camo. Could really be time to do another one now

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Regarding that sandpaper effect, I tend to get a bit of it randomly here and there no matter how I try to avoid it, maybe that matt coat is the culprit, maybe not. I would get some MicroMesh sanding pads (or a nail polishing stick!) and carefully get rid of the worst of it, then maybe touch up the affected areas with another shot of gloss if I thought it was necessary. The final satin- or matte coat is also a bit forgiving when it comes to hiding this kind of imperfections!
Regarding that flat clear protection coat, I'm not sure that would be necessary since it won't help LifeColor adherence (my main gripe with LC paints) and you are anyway shooting a layer of gloss clear!
No matter what, I think you're doing a great job on this one and I love the look of that camo, breaking it up look with preshading and mottling.
Finally: have you used ready made masks for the canopy or did you cut them by hand?
Magnus