A transitional period after the UK formally leaves the European Union in spring 2019 will be needed to avoid instability caused by a “cliff edge” Brexit and to facilitate a smooth withdrawal, Philip Hammond has told MPs.

In yet another clarification to the UK Government’s Brexit strategy, the Chancellor told the Commons Treasury Committee that "thoughtful politicians" could see the need for a transitional arrangement; remarks thought to be a dig at his colleagues who want a hard Brexit.

His words came as the House of Lords EU Committee today called for Theresa May and her ministers to draw up transitional arrangements to carry on trading with the EU after Brexit while they negotiated a long-term trade deal.

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The peers said it was unlikely the Government would be able to achieve the "bespoke" agreement promised by the Prime Minister within the two-year withdrawal period under Article 50.

They also called for the Government to draw up a clear "game plan" before beginning the divorce process to safeguard UK jobs and trade while negotiations on a final trade settlement continued.

Appearing before MPs, Mr Hammond said: “There is 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."

Businesses, particularly in the City of London, have expressed concerns about the possibility of a sudden "cliff edge" change in arrangements once the UK left the EU, particularly if it also quit the single market.

The Chancellor said both the UK and the remaining 27 members would need to agree on the need for a transitional arrangement rather than it being demanded by Mrs May during the negotiations.

He explained: "I don't think we should approach this on the basis that we need transitional arrangements because we can only get to a situation where we have a transition if there is a genuine meeting of minds on both sides of this negotiation."

He added: "The further we go into this discussion, the more likely it is that we will mutually conclude that we need a longer period to deliver."

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Asked about business calls for a transition period of at least two years following Brexit, Mr Hammond told the committee that 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.

"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," he added.

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

He made clear no decision had yet been made on whether or not the UK would "aspire to remain in some form of customs union arrangement" after Brexit. He also stressed that controls on European migration, which would be possible after Brexit, would not "choke off " the supply of high-skilled workers.

Labour MP Stephen Kinnock MP, a supporter of the Open Britain group campaigning for a soft Brexit deal, said: "It's encouraging to see 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.”

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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."