Philip Hammond has left open the possibility of Britain being part of a customs union with the EU after Brexit in a letter to parliament’s Treasury watchdog.

The chancellor, who is on the side of maintaining a close relationship with the the bloc, said the government would be guided by what deliverd the greatest economic advantage to the UK.

We can stop Brexit. But we’ll need some help from across the Channel | Timothy Garton Ash Read more

The final arrangement would also look at “three strategic objectives”, said Hammond. They are “ensuring UK-EU trade is as frictionless as possible; avoiding a ‘hard border’ between Ireland and Northern Ireland; and establishing an independent international trade policy”.

The chancellor gave the answer in reply to a letter from the Treasury committee, chaired by the Conservative MP Nicky Morgan, which asked him whether he would like to “explicitly rule out the UK participating in a customs union with the EU as part of its end-state relationship”.

Morgan, a former cabinet minister, 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. 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.”

Q&A What is regulatory alignment? Show Hide Inside the EU, both Ireland and Northern Ireland (as part of the UK) are part of the single market and customs union so share the same regulations and standards. The only way to avoid a hardening of the border after Brexit is to ensure regulations and standards on both sides remain more or less the same in areas like food, medicines and so on. This might imply a permanent acceptance of EU rules – something that would be anathema to hardline UK Brexiters and the DUP, who reject anything that would "decouple" the North from the UK. David Davis told parliament that regulatory alignment would not mean adopting exactly the same rules as the EU but "mutually recognised" rules and inspections. However, an official in Brussels countered that regulatory alignment would mean that the UK would have to implement rules from Brussels without having any influence over them. What is the government’s plan for ‘regulatory alignment’?

Davis says the UK could continue to follow some rules of the EU’s single market. This would help avoid a hard border, but would also limit the UK’s ability to diverge from EU regulations. What does the EU think?

Davis thinks the UK and EU can agree to meet the same aims, while achieving them in different ways. The EU believes this could see its standards on workers’ rights and the environment undercut. Can it even work?

Parliament cannot bind its successors. This principle would mean a deal would never be completely secure for more than five years – putting its feasibility in doubt. Photograph: PA

The government has for the last year maintained that the UK would leave the existing customs union, but has not ruled out negotiating membership of some kind of separate customs union arrangement.

A customs union with the EU would avoid the need for border checks and help solve the problem of trade on the island of Ireland.

Brexit supporters in the cabinet are adamant that Britain must be able to strike trade deals with third parties, such as the US, Canada and others, which is not possible in a conventional customs union relationship in which members share a common external tariff.

Theresa May is facing a big cabinet battle with her colleagues in the coming months over how the UK would like its future relationship with Brussels to work, including issues such as a customs union and the extent of regulatory alignment.