Leaked information from Brussels suggested the bloc’s negotiating team has already rejected a British blueprint for the free trade of goods.
And relations between the two sides hit a new low last night as it was alleged that EU officials had been bugged by British security services to obtain the details.
The leaked information about the Brussels negotiating position came from a slide presentation prepared by the EU’s negotiators.
The current UK proposal is for “goods” to be regulated by a common rulebook – but for UK regulation for “services” to diverge from Brussels rules.
But the presentation set out in detail why the EU would refuse to accept any arrangement leading to UK goods and services being treated differently, as proposed by the Government.
In the slides, EU negotiators argued that allowing the split would let Britain gain a competitive advantage.
Further slides went into detail about how different economic sectors such as chemicals and cars mixed both goods and services production.
The Commission concluded that allowing the separation in customs arrangements would lead to a “level of erosion in the single market”.
Despite the claims of a leak, UK and EU negotiators resumed their talks in Brussels yesterday as they attempted to resolve the dispute over the future of the Irish border.
They were due to discuss details of the future trade relationship between the EU and UK today.
But Eurosceptic Tories last night said the EU position, revealed by the Brussels leak, showed the Brexit plan agreed by Cabinet ministers at Chequers last month was dead.
Tory MP Andrew Bridgen, a member of the European Research Group of Eurosceptic Conservatives, said: “Whatever happens now, we have to accept this is not an amicable divorce. We need a clean break from the EU.”
Brussels officials raised security concerns after the UK negotiating team obtained the leaked material “within hours” of the slides being discussed by Commission insiders, according to a report yesterday.
Sabine Weyand, the EU’s deputy chief Brexit negotiator, reportedly told officials that “it could not be excluded” that British intelligence agents had penetrated their meetings.
The contents of the slides were shared between EU officials on July 5, the day before the Cabinet meeting at Chequers which signed off a Brexit blueprint.
The Department for Exiting the EU declined to discuss the bugging allegations or the leak.
Despite the row, Business Secretary Greg Clark, who has been meeting European ministers and business figures this week, was confident of finding a way ahead.
He said: “The UK and the EU now have the foundations and opportunity to come to a pragmatic and mutually beneficial deal.
“It is in everyone’s interest that an agreement is reached quickly and No Deal is avoided.”
Meanwhile, concern was growing among Eurosceptic Tories that the Prime Minister is poised to cave in to EU pressure for Britain to effectively continue to accept free movement for EU citizens.