The pound weakened on the news.
After briefings by EU negotiators and reviewing British statements, the European Parliament's Brexit Steering Group made clear that Prime Minister Theresa May's White Paper this month setting out how future EU-UK trade relations would avert customs and other disruptions on the divided island was not acceptable.
"The EU can not and the EU will not delegate the application of its customs policy, of its rules, Value-Added Tax and excise duty collections to a non-member who would not be subject to the EU's governance structures", Barnier said.
The EU's verdict is a blow to May.
As before the referendum, when President of the European Council Donald Tusk warned Brits that voting to Leave could mean "the end of Western political civilisation" and David Cameron asked then-U.S. President Barack Obama to threaten to send the country to the "back of the queue" for a trade deal, former Remain campaigner Theresa May appears to have support from overseas for her scare tactics.
Dominic Raab looks on during a news conference with Michel Barnier in Brussels, Belgium, July 26, 2018. She wanted to go a different route. He is not convinced that it is legal to transfer the customs activity to a country outside the Union.
Barnier even suggested one way out of the impasse would be for the United Kingdom to stay inside the EU customs union, though that would enrage parts of her Conservative Party and mean May having to renege on her repeated promises to leave it.
Two years down the line the British electorate remains polarized but still committed to Brexit. But of course if we have no deal we will want to make sure that we're prepared at the border with the knock-on effects that that would have if on the European Union side they take the worst case scenario approach, which is frankly irrational.More news: A Transgender Woman Says A Pharmacist Refused To Fill Her Hormone Prescription
The pound weakened on his comments and was down 0.5 percent at $1.3129 as of 6:25 p.m.in London time.
France's European affairs minister Nathalie Loiseau warned that Britain would suffer more than the EU if no deal was reached. Mr Barnier said there had been progress on the issue of security and data sharing. Both sides have stepped up "no-deal" contingency planning.
It follows the EU (Withdrawal) Act which received Royal Assent from Queen Elizabeth, aimed ensuring Britain's statute book functions after Brexit, regardless of the outcome of the negotiations.
"We have considered the innovative approaches the European Union has taken in the past with other third countries - when the political will has been there", he said.
They would also want to forward buy so they are not subject to currency fluctuations, he said.
For his part, Mr Raab put a more positive gloss on the state of play in negotiations.
Mr Raab and Mr Barnier have agreed to meet again in mid-August before holding weekly discussions until October, which has been set as a deadline for concluding a Brexit deal.