Excellent advice and almost certainly the way to go. It's going to look suspicious ("I didn't know that I couldn't use someone else's VAT number ... honest!") but I don't see any other viable alternative. With a bit of luck, penalties may be waived or (at the very least) reduced (especially if the VAT portion is relatively negligible).
Retaining the client may be the trickier challenge. I guess you have to choose between coming clean and trying to build a relationship on trust (and risk losing the client) or keeping quiet about the whole thing and settling for a relationship that will always be on thin ice (and hoping they never find out).
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