Michael Gove insisted a trade deal with the EU was still possible last night – even as Brussels began legal proceedings against the UK.

Mr Gove said that with mutual ‘goodwill’ an agreement could be reached ahead of the Prime Minister’s deadline of mid-October.

The EU had given Britain until last night to ditch the controversial elements of the Internal Markets Bill – legislation that threatens to override parts of the Withdrawal Agreement.

However, the Bill remained unchanged and MPs voted decisively this week to back it. As a result, European Commission president Ursula von der Leyen yesterday issued a ‘letter of formal notice’ which could eventually lead to a court case against the UK at the European Court of Justice.

It could see EU judges hand Britain massive fines. But, despite this, Brussels has not walked away from talks over a post-Brexit trade deal. Last night Mr Gove, the Chancellor of the Duchy of Lancaster, told MPs: ‘Progress has been made in a huge number of areas.

‘There are still one or two sticking points on state aid, the level playing field and fisheries, but I think with goodwill on both sides we will achieve resolution, and I know this government is determined to do so.

‘But we have clear red lines and it’s vitally important that we maintain our faith with the electorate and ensure on January 1 we leave the EU single market and customs union and take back control.’

Dutch prime minister Mark Rutte appeared to play down the importance of the Commission’s letter, calling it ‘more administrative than political’.

Announcing the legal proceedings, Mrs von der Leyen accused Britain of trying to rewrite parts of the Brexit divorce treaty agreed last year. ‘This draft Bill is a breach of the obligation of good faith in the Withdrawal Agreement,’ she said.

A Government spokesman said Britain ‘will respond to the letter in due course’. EU lawyers have given Britain one month to answer.

Brussels lawsuits can sometimes take years to resolve. They are often settled before they reach the European Court of Justice, which has the power to fine countries.

French Europe minister Clement Beaune, a close ally of President Emmanuel Macron, accused Britain of ‘calling into question’ the Brexit divorce treaty. He said the EU will refuse to ratify any deal unless the Bill is scrapped.

It leaves both sides enough wriggle room to defuse the row if an agreement is found. The Government has always said the Bill was merely ‘a safety net’ if there was a No Deal Brexit.

Commission officials said EU Brexit negotiator Michel Barnier is ‘determined’ to strike an accord. Diplomats continued to hold trade negotiations yesterday after the announcement was made.

But some EU officials are worried that Britain might row back on any promises made during those talks.