Report: UK and EU sketch out deal on migrants and trade

They said the UK would still have to make large payments into the EU budget, on the model of associated nations such as Norway and Switzerland.

The seven-year immigration brake would go much further than the four-year brake on some types of welfare for EU migrants that the UK had been offered prior to the referendum.

Commenting on The Observer’s report, Dutch MEP Hans van Baalen said the UK would also have to let EU migrants who are already living in the UK stay in place.

“If the rights of EU citizens now living the UK can be guaranteed permanently by the UK government, then I think we can look at some form of emergency brake on free movement of labour,” he said.

Philip Hammond, the British finance minister, told the BBC at a G20 meeting in China: “What we now need to do is get on with it in a way that minimises the economic impact on the UK economy in the short term and maximises the benefit in the long term.

“I don't think they [the EU] are in punishment mode.”

But John Redwood, a Conservative MP, told The Observer that temporary curbs on EU immigration would not be good enough.

“The UK did not recently vote for a slightly beefed up version of [former British PM] Mr Cameron’s attempted renegotiation with the EU. We voted to leave, to take back control of our laws, our money and our borders”, he said.

The issue of UK contributions to the EU budget could also prove difficult.

Britain last year paid €21.2 billion gross into the EU treasury.

It got back €5.8 billion under the terms of its rebate and a further €5.3 billion in EU payments for British farmers and other beneficiaries, but with the perks and benefits also up for renegotiation, its post-Brexit net fee could be substantial.

Keith Vaz, a senior MP from the opposition Labour party, said Britain should also maintain cooperation with Europol, the EU’s joint police agency, and take part in the EU arrest warrant, which speeds up extraditions.

He noted that Theresa May, the new British PM and former home secretary, had praised Europol and the EU warrant prior to the referendum.

“After the Munich attack and other attacks across Europe, it is even more important that these relationships continue”, he told The Observer, referring to a shooting on Friday in Germany that killed nine people.

Article 50

The UK will start formal negotiations on the terms of its EU divorce only after it legally notifies the European Union of its intention to leave by invoking article 50 of the EU treaty.

Speaking to the BBC on Sunday, Patrick McLoughlin, the Conservative Party chairman, said this would happen before the next general election, which is due by 2020.

Jason Coppel, a government lawyer, told the British High Court last week that it would happen no earlier than 2017.

Top EU officials have categorically ruled out holding informal talks on future UK relations until article 50 notification takes place.

But Mark Sedwill, a senior British civil servant, speaking at an event hosted by The Institute for Government, a London-based charity, last week said that this was not true in practice.

“Talks about talks, agreements in principle, things that are initialled before they are signed; all this kind of thing is the meat and drink of of international negotiations,” he said.

“With some ingenuity and some good will, it should be possible to do all of these thing in parallel [to the article 50 protocol].”

Britain is already pursuing the parallel approach on trade.

So long as it remains an EU member, it is not entitled to hold negotiations with non-EU countries on bilateral agreements.

The situation means Britain is endorsing EU talks on free trade pacts with Canada and with the US even though it will not be part of them after it leaves the European Union.

But Hammond, the British finance chief, told the BBC that he had started talks on a UK-China free trade deal in the margins of the G20 event in Beijing.

UK-China deal

He said China would get greater access to the UK market for manufactured goods and investments in return for reducing barriers for British banks and insurance firms.

With the EU and China currently locked in a tariff war on steel, Hammond added: “The mood music that I have heard here [at the G20] is very much that this [Brexit] will mean more opportunity for countries like China that are outside the European Union to do business with Britain”.

“As Britain leaves the European Union and is not bound by the rules of the European Union perhaps it will be easier to do deals with Britain in the future”, he added.

The EU also has an arms embargo on China dating back to the Tiananmen massacre in 1989.

But the UK would be unlikely to start selling weapons to China in return for a better trade deal due to the security concerns of its main ally, the US.