The UK could remain tied to the European Union rules and continue paying into Brussels’ budget until the end of 2022.
The possibility of extending the transition period, which is currently due to expire at the end of 2020, was included in Theresa May’s draft EU Withdrawal Agreement.
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The possible end date was left undecided, simply written 20XX.
The latest version the withdrawal agreement allows for an extension to the transition for “up to one or two years”.
This would mean the UK would still be subject to some European Union rules without representation in Brussels – six and a half years after voting for Brexit.
A 'matter of months'
The Prime Minister Theresa May has insisted that if an extension is needed it would only last for a "matter of months" while final arrangements for the future relationship between the UK and European Union are put in place.
An extension to the transition period, during which the UK will remain in the single market and customs union but without a say over EU rules, would prevent the controversial "backstop" measure to avoid a hard border with Ireland coming into effect while alternative arrangements are made.
Last week Mrs May said it was important that the UK is out of the "implementation period" by the time of the next general election, scheduled for June 2022.
Any extension would be subject to a vote by the UK Parliament.
Mrs May announced on Thursday that a draft political declaration outlining the UK's future relationship with the EU had been agreed, following her meeting with European Commission president, Jean-Claude Juncker, on Wednesday night.
The political declaration along with the withdrawal agreement proposed last week will form the UK's overall Brexit deal.
"I had a good, detailed discussion with President Juncker where I set out what was needed in that political delcaration to deliver for the UK," she said.
"We tasked our negotiating teams to continue working overnight and as a result the text of that declaration has been agreed between the EU and the UK."