By the way OP, I don't think it is usual for the bride's parents to pay for the whole wedding anymore, especially when most of the guest list is from the groom's side.
The way I see it, there are two questions that need to be asked.
- Is there a hard limit on numbers at the venue?
- Do they actually want to invite all of the groom's extended family?
If the answer to the first question is yes, that simplifies matters. They take the total number of people, subtract the bride's family and friends (including the couple you want to invite) and then the number that is left is the number of places available for the groom's family and friends. If choices then have to be made, he explains to his family that his hands are tied by the venue capacity and not everyone can be invited.
If the answer to the first question is no and the answer to the second question is yes, but there is a budget constraint (which there should be), then the bride and groom, in consultation with you and your husband, decide how many guests the current budget allows for. Then the groom tells his parents that they would like to invite all these extra family member, but it's not currently affordable unless they put their hands in their pockets and contribute financially.
If the answer to both questions is no, the groom needs to grow some balls and tell his family that since they're not the ones getting married or the ones paying for the wedding, they don't get to dictate the guest list.
Did you and your husband set a hard budget for this wedding, OP? Because if you said, "Here's £20k to pay for your wedding" and they're organising it how they want, then provided you get to invite your two friends which I think is reasonable, it's fine to take a hands off approach. If they're planning a wedding for, what, 200 guests (?!) out of the budget you've given them, that's a choice they've made.
But if you just said, "We'll pay for your wedding, just send us the bills" and the groom and his family want to invite a much bigger number of guests from his side than there will be on the bride's, have not offered to contribute to the costs and are now arguing over how many people can come to a party you are paying for and they aren't, that's really not on and they are abusing your generosity.