THE UK's future relationship with the European Union might not be finalised by the Brexit deadline, Philip Hammond acknowledged as he indicated a transitional deal could be necessary to avoid instability across the continent.

The Chancellor said there was an "emerging view" that a longer period than the two years set out under the Article 50 process may be required to stitch together a trade deal.

Theresa May has promised to trigger Article 50 by the end of March, starting the formal countdown to Brexit by April 2019.

But businesses - particularly in the City - have expressed concerns about the possibility of a sudden "cliff edge" change in arrangements once the UK leaves the EU, particularly if it also quits the single market.

Mr Hammond said "thoughtful politicians" and officials on both sides of the English Channel could see the benefits in an transitional approach.

Giving evidence to MPs on the Treasury Select Committee, the Chancellor said: "There is, I think, an emerging view among businesses, among regulators and among thoughtful politicians - as well as quite a universal view among civil servants on both sides of the English Channel - that having a longer period to manage the adjustment between where we are now as full members of the European Union and where we get to in the future as a result of the negotiations that we will be conducting would be generally helpful, would tend towards a smoother transition and would run less risks of disruption including, crucially, risks to financial stability which must be a fairly real concern."

His comments came after suggestions in a leaked memo following a meeting with financiers that Brexit Secretary David Davis was "not really interested" in a transitional deal.

A spokesman for Mr Davis's Department for Exiting the EU insisted that the document did not "properly reflect" his views or Government policy and the Brexit Secretary was "looking at all options" to deliver a smooth and orderly exit from the EU.

Mr Hammond said a deal could cover the period between Brexit and a "clear and firm end state", setting out the period of adjustment to reach that goal.

But it could also be the case that if the two-year Article 50 period had expired with "no conclusion" on the "final end state of future arrangements", a transitional period could be needed to cover further negotiations.

He said: "In principle certainty is always preferable to uncertainty. But if it's a certainty of something very unfavourable then that's not quite so good."

Asked about business calls for a transition period of at least two years following Brexit, Mr Hammond told the committee he expected there to be tension between industry and bureaucratic pressure for a longer changeover and a desire among politicians to get on with the job.

But he added: "It's not just the business sector, it's the government sector that has had to think about how long it takes to make changes, hire people, train people, introduce IT changes."

As an example, he warned that if the UK left the European Customs Union under a "hard Brexit", the country could face a fivefold increase in border checks, costing hundreds of millions of pounds a year.

"There could be quite significant physical infrastructure changes that need to be made at ports of entry and exit not only in the UK, but in continental Europe as well," Mr Hammond told the committee.

"There might be a need to train large numbers of people in anticipation of more intensive procedures at borders.

"It is true that in certain conceivable outcomes, there would be a very substantial increase in the numbers of customs submissions and customs inspections. We are talking about - in EU trade - perhaps five times as many submissions and inspections being required.

"It could certainly add hundreds of millions of pounds to the cost of operating the customs services."

Mr Hammond pointed out that the extra cost could be offset by any new tariffs charged on imports by the UK Government.

The Chancellor also cautioned that the UK's desire to engage in the freest possible trade after Brexit may not bear immediate fruit.

It was "not necessarily" the case that "because we have a desire for freer and more open trade, the short-term deliverable is more trade", said Mr Hammond. "It may take time during the transition process to see the benefits of that."

Officials from the Treasury, Brexit and International Trade departments are examining the possible impacts of tariffs on different sectors as a result of leaving the EU, Mr Hammond said.

The Chancellor said no decision had yet been made on whether the UK would "aspire to remain in some form of customs union arrangement" after Brexit.

Mr Hammond insisted that controls on European migration which will be possible after Brexit would not "choke off " the supply of high-skilled workers.

He added: "I don't think it is highly-paid, highly-skilled people that cause concern among our own population about migration numbers."

Mr Hammond said the Tory aim of cutting net migration to the "tens of thousands" was a "long-term objective".

He indicated that could be achieved by boosting the skills of British workers and by replacing some jobs currently done by low-paid migrants with machines, particularly in the agricultural sector.

Labour MP Stephen Kinnock MP, a supporter of the Open Britain group campaigning for a soft Brexit deal, said: "It's encouraging to see that Philip Hammond understands the need for a transitional deal to stop Britain falling into a hard, destructive Brexit that would take our economy over a cliff edge.

"There is a growing consensus that agreeing a new trading relationship between Britain and Europe may take much longer than the two years specified by Article 50. Not signing a transitional arrangement would mean punishing tariffs which would hit British businesses and raise prices in the shops."

But Steve Baker, chairman of the European Research Group of MPs calling for a clean break from Brussels, said: "Our withdrawal agreement should allow financial services and other business to proceed uninterrupted on the basis of mutual recognition and equivalence."

He added that a later "broad and deep bilateral free trade deal on the basis of global standards and national recognition would be permanent".