The government said broadly similar arrangements could apply to EU-UK trade in goods as they do now for around two years.
The government said broadly similar arrangements could apply to EU-UK trade in goods as they do now for around two years, to allow businesses longer to adapt to new post-Brexit systems.
Unlike at present, however, Britain said it wanted to be able to negotiate free trade agreements with third countries during the interim period which would then be implemented afterwards.
"It's much more sensible, we think, if there is a shortish period in which we maintain the current arrangements," Brexit minister David Davis told BBC radio, adding that it could last "something like two years" -- ending before the 2022 election.
The proposal for a transitional arrangement was welcomed by the Confederation of British Industry, Britain's big business lobby group, but critics dismissed it as a "fantasy".
The European Commission, the EU's executive arm, said it would "take note" of the proposals, but warned: "'Frictionless trade' is not possible outside the single market and customs union."
EU chief negotiator Michel Barnier also repeated that talks on the future trading relationship could not begin until progress was made on other issues, including Britain's exit bill.
Britain says its membership of the EU customs union, which allows for the tariff-free movement of goods, will end along with its membership of the single market -- its largest trading partner -- when it leaves the bloc in March 2019.
Experts have warned it will be extremely difficult, if not impossible, to negotiate a new EU-UK free trade agreement before then, raising fears of a damaging "cliff-edge".
"One possible approach would be a temporary customs union between the UK and the EU," the Brexit ministry said.
The CBI's deputy director Josh Hardie said the government's proposal was "encouraging", but added: "The clock is ticking and what matters now is giving companies the confidence to continue investing as quickly as possible."
In a policy paper published on Tuesday, Britain said it could streamline and simplify trade arrangements with the EU once it has left the customs union.
But it admitted there would be "an increase in administration compared with being inside the EU customs union".
An alternative would be a new customs partnership in which Britain effectively adopts the EU's external customs border to allow for free EU-UK trade, but applies its own trade policy and tariff for imports and exports with third countries destined only for the UK market.
But in recognition of the huge practical challenges that Brexit presents, the policy paper acknowledged this was "an innovative and untested approach".
A third round of Brexit negotiations is due to begin at the end of August, focused on Britain's financial settlement, the issue of expatriate rights, and the border between British-controlled Northern Ireland and Ireland.
London argues that customs arrangements are crucial to resolving the Irish border issue, on which it plans to publish further proposals on Wednesday.
But Brussels insists there must be broad agreement on the three priority issues before trade negotiations begin, by the EU leaders' summit in October at the earliest.
"The quicker UK & EU 27 agree on citizens, settling accounts and Ireland, the quicker we can discuss customs and future relationship," Barnier said on Twitter.
Opposition Labour lawmaker Chris Leslie, from the campaign group Open Britain, said the proposal for an interim customs union represented "wishful thinking of the highest order".
"It is a fantasy to pretend we can have the freest and most frictionless trade possible with our largest partner when the government remain intent on pulling Britain out of the customs union," he said.
Guy Verhofstadt, the European Parliament's outspoken Brexit negotiator, added: "To be in & out of the Customs Union & 'invisible borders' is a fantasy."