Last year my friend’s company; MC Ltd was having cash flow difficulties, so my company; IQ Ltd paid some of the outstanding debts with MC’s suppliers. The amount paid was recorded as a debt between our companies. When looking at the books of IQ Ltd the VAT inspector told me I should reclaim the VAT on the invoices IQ paid on behalf of MC Ltd. Is that correct?
The VAT inspector is wrong. Only MC Ltd can reclaim the VAT shown on invoices from its suppliers, as MC Ltd is the company that received the goods or services, not IQ Ltd. You have treated the transaction correctly. This shows how important it is for your suppliers to make out invoices correctly. If the invoice is addressed to a business that did not receive the goods or use the services, the VAT cannot be reclaimed