I think it would be better and easier to fit a 7 speed hub, this subject has been covered a couple of times in the forum.
I converted my first C5 to take a 3 speed hub, I just cut off the rear fork from an old frame and brazed it to the C5 frame. Before cutting of the fork I brazed 2 small plates between the arms to retain the correct positioning, these were later removed but could have remained for strength.
Because I will be using a trailer on my second C5 I'll be fitting a 7 speed hub, the hub is a freewheeler and IIRC this hub will also accept a disk for braking. I also have a 3 speed hub with integrated 7 speed derailleur set, but I will not be using this unit because of the ground clearance (now and again I have to drive over long grass).
If you do use a derailleur unit it would be advisable to avoid a MB cogset because of the longer shifter cage length, this will affect the ground clearance. The close ratio cogset only requires a short shifter length.
If you need any other info just email me.
EDIT: I forgot to mention the front end and chain, you will have to swop the front end or grind the teeth down to accomodate the narrower chain.