Who to invoice

We operate a VAT accounting system which is quite common for accountants as a result of providing a ‘continual service’. Under this scheme we initially raise a request for payment and upon settlement we issue a formal VAT invoice to the client.

We undertook some work for a client X but this client no longer has an effective bank account. Our fee has been partially paid by an associated company Y.

Upon receipt of the money we raised an invoice in the name of X notwithstanding that the cheque came from Y.

Company Y has just received a VAT inspection and the client was told by the Inspector that as the paying company Y could claim the input VAT so long as our invoice was made out to Y.

Can this be correct given that the service was originally...