Whitehall sources said they believed free movement of goods was “100% the direction of travel” as the prime minister’s focus shifts to the next battle over Britain’s future relationship with the EU after next week’s Brussels summit.

Downing Street remained tight-lipped, reiterating that the UK would be leaving the single market in its entirety. However, cabinet sources suggested the issue could be on the agenda at the Brexit “war cabinet” awayday at Chequers in early July.

Government insiders believe that Britain might be able to retain a relatively frictionless trading relationship if it sticks to single market rules on manufactured products but diverges elsewhere, such as on services.

But Brussels is unlikely to accept the proposal as it would require concessions on the free movement of people. UK negotiators would also push for an independent trade policy.

One cabinet source said: “If you look at how all the negotiations with Brussels have been structured it looks like the whole process has been geared towards this endgame. But the big kicker for Brexiters will be freedom of movement.

“What No 10 is banking on is that the EU will let them fudge this and give them some sort of flexibility. They’ll come up with clever wording but it will basically be freedom of movement by another name. There’s no way Brussels is going to allow us an opt-out.”

A Whitehall official added: “It is the logical extension of the prime minister’s Mansion House speech that there would be a relatively high degree of alignment … But we want an independent trade policy. It would be a massive negotiating challenge.”

Some Tory Brexiters believe Brussels is gearing up to offer the UK access to its markets this autumn, before the party conference season, on the understanding that May would accept some degree of freedom of movement, currently one of the prime minister’s red lines. 

Up until this point debate on the model for Britain’s future relationship with the EU after Brexit has focused on either the “Norway” model, in effect staying within the single market, or a free trade deal like the one the EU has with Canada.

However, officials in both London and Brussels are now beginning to look at a potential third way, a so-called association agreement like the one the EU has with Ukraine and various other countries.

Charles Grant, the director of the Centre for European Reform, said on Wednesday that a single market for goods was the only way to resolve the Irish border problem and prevent disruption of manufacturers’ supply chains.

However, he acknowledged the move would cross the prime minister’s red lines on freedom of movement and would require a degree of oversight by the European Court of Justice.

The idea has also been pushed by Henry Newman, a former political adviser to Michael Gove who now runs the pro-Brexit Open Europe thinktank.

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