I'm going to seriously simplify your question. Here's the code:

#!/usr/bin/perl

use strict;
use XML::Twig;

binmode(STDOUT, ":utf8");

my $t= XML::Twig->new();
$t->set_keep_encoding;
$t->parse(do { local $/; <DATA>});
$t->flush;

exit 0;

__END__
<?xml version="1.0" encoding="UTF-8"?>
<harvest>
 <subject>Computation &amp; Language</subject>
 <subject>Computer Science - Computation &amp; Language</subject>
</harvest>
[download]

And here's the output:

<?xml version="1.0" encoding="UTF-8"?>
<harvest><subject>Computation & Language</subject><subject>Computer Sc
+ience - Computation & Language</subject></harvest>
[download]

And you want to change the &'s to &'s. The solution seems to be to remove the call to set_keep_encoding. When I remove that, the output becomes what you want. Whether that's a bug in the keep-encoding or the flush or whatever, I don't know. Hopefully mirod can help here ;-)

Update: It appears I was a few minutes behind mirod on this. Oops. :-)