Managed to indent and lift sub categories via stylesheet:
#sidebar li.widget_core_coll_category_list ul li ul li{
text-align: left;
line-height:1.6em;
list-style-type: none;
border-bottom: none;
margin: -6px 0px 0px 16px;
}

Change colour of sub category links by adding:
#sidebar li.widget_core_coll_category_list ul li ul li a{
color:#666699; background:transparent;
}