Chancellor Philip Hammond has refused to rule out being in a customs union with the EU after Brexit.

Mr Hammond was offered the opportunity to close down the option of the UK remaining in a long-term customs union with the EU during an exchange of letters.

Chair of the Treasury Select Committee Nicky Morgan who wrote to the Chancellor, said it proved the option was still on the table.

It comes as British negotiators prepare to hammer out details of how the UK’s transition period will be governed once the country’s EU membership ends, expected to be in March 2019.

Theresa May has said the country will leave the existing EU customs union at that point, with Brexiteers demanding the move to allow Britain to negotiate new trade deals.

But in her exchange of letters with the Chancellor, Ms Morgan offered Mr Hammond the opportunity to rule out the UK being in any customs union with the EU – something he declined to do.

The Conservative Committee Chair said: “It was widely thought that being in a long-term customs union with the EU had been ruled out by the Government. But the Chancellor’s letter confirms that this is not the case.

Brexit: the deciders Show all 8 1 /8 Brexit: the deciders Brexit: the deciders European Union's chief Brexit negotiator, Michel Barnier Getty Brexit: the deciders French President Emmanuel Macron Getty Brexit: the deciders German Chancellor Angela Merkel Reuters Brexit: the deciders Commission President Jean-Claude Juncker EPA Brexit: the deciders The European Parliament's chief Brexit negotiator Guy Verhofstadt Getty Brexit: the deciders Britain's Prime Minister Theresa May Getty Images Brexit: the deciders Britain's Chancellor of the Exchequer, Philip Hammond PA Brexit: the deciders After the first and second appointed Brexit secretaries resigned (David Davis and Dominic Raab respectively), Stephen Barclay is currently heading up the position PA

“It is vital that the Cabinet reach agreement on these central questions about the UK’s future relationship with the EU, as a matter of urgency.”

The Cabinet is still divided over what the end state relationship with the EU should be with Mr Hammond and Home Secretary Amber Rudd backing a closer relationship with Europe, while the likes of Foreign Secretary Boris Johnson and Environment Secretary Michael Gove are pushing for greater divergence.

Mr Hammond’s response suggests the idea of being in a form of modified customs union with Brussels is still something being considered by the Prime Minister.

But the notion will anger Brexiteers who want the country to completely break free from the EU, and sign new trade deals with other countries – something that a customs union of any sort is likely to exclude.