With talks set to resume today, the EU plans would see Britain officially leave the bloc in March 2019 but then be governed by EU laws and institutions for another two years without being allowed to sit at the table making decisions.
The revelations have led influential pro-Brexit group Leave Means Leave, which is backed by more than 50 Tory MPs and MEPs, to call on Mrs May to reconsider her plans.
The Commission’s document notes that it believes Mrs May’s request for a transition period of about two years “would require a temporary application of Union law to and within the United Kingdom together with regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures”.
It also notes “a non-member of the Union, that does not live up to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member”.
Richard Tice, co-chairman of Leave Means Leave said: “The EU want Britain to remain trapped in the EU during a transition period, abiding by the laws of the EU and still funding the EU.
“At the same time it wants Britain to be completely powerless in the EU, unable to take advantage of our Brexit opportunities.
“Accepting this wouldn’t just be a bad deal – it would be a disastrous deal and our Government must not fall for the vested interests of the CBI and the multinationals who support such a plan.”
He added: “It is becoming increasingly clear – given the behaviour of the EU – that Britain would be better to leave the EU in March 2019 and revert to a World Trade Organisation (WTO) based deal which is a perfectly sensible plan that will help British business to thrive.”
Former British Chambers of Commerce director John Longworth and Economists for Free Trade led by Margaret Thatcher’s adviser Professor Patrick Minford have estimated that the UK could be better off by about £150 billion a year by just leaving the EU on WTO rules and no deal.
They believe it will allow the UK to deregulate and set up free trade deals which will massively boost prosperity.
The row comes as the European Parliament’s chief Brexit negotiator Guy Verhofstadt has brought a “no deal” closer by dismissing claims that an agreement on citizen rights is imminent.
Arch federalist Mr Verhofstadt has been accused of wanting the talks to fail and his intervention could mean that the negotiations do not move on to trade in December.
If this happens then Mrs May is expected to quit the talks and prepare for World Trade Organisation rules which many believe is the best way for the UK to proceed.
Last night, Mr Verhofstadt claimed that “major issues” must still be resolved on safeguarding citizens’ rights after Brexit before they can be allowed to progress.
The talks have been grinding slowly and Verhofstadt said that London’s assurances on the status of EU citizens living in Britain were not good enough.
Mrs May has said the two sides were “in touching distance” of a deal and said on Tuesday the UK government expected most EU citizens currently living in Britain would be allowed to stay after Brexit in 2019.
“We don’t recognise reports suggesting that a deal on citizens’ rights is almost finalised. There are still major issues that have to be resolved,” Verhofstadt said.
He said one of his concerns was that Britain should grant a settled status to EU citizens based on a free-of-charge declaration while London’s latest proposal envisaged a conditional application.