Ministers are planning new legislation that would override a key part of last year’s EU withdrawal agreement.
The move would eliminate a requirement for new Northern Ireland customs arrangements which were intended to prevent the return of checks at the border with the Irish Republic.
Labour’s shadow health secretary Jonathan Ashworth accused the PM of backtracking on his promises.
Downing Street said it was a standby plan in case trade talks fail.
Boris Johnson is expected to say later that if no agreement is reached by 15 October, both sides should “move on”.
The prime minister will tell EU counterparts that completing the UK’s exit from the bloc without a trade deal would still be a “good outcome”.
It comes after UK chief negotiator David Frost said the UK was not “scared” of walking away.
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Although Britain formally left the EU in January, the UK has continued to follow rules set in Brussels during a transition period – which ends in December – while discussions over a long-term trade agreement continue.
Another round of talks – the eighth – begins on Tuesday, aimed at securing a deal to allow companies in the EU and UK to trade without taxes or customs checks.
But on the eve of negotiations resuming, the Financial Times reported that the Internal Market Bill would “eliminate” the legal force of the Withdrawal Agreement, a deal struck less than a year ago, in areas including state aid and Northern Ireland customs.
As part of the terms of the Northern Ireland Protocol, the region is expected to continue to follow some EU rules after the transition period ends on 31 December 2020 to ensure there is no hard border.
The government’s reported plan would also override provisions on state aid – the financial assistance sometimes given by the government to companies – which has been one of the key sticking points in talks.
BBC political correspondent Chris Mason described it as an “electrifying development in the Brexit process” that would “attempt to free the UK of an obligation… to check goods crossing from Great Britain to Northern Ireland”.
That obligation aimed to prevent the return of infrastructure, such as border posts, along the UK’s border with the Irish Republic, which many fear could prove detrimental to peace.
Labour’s Jonathan Ashworth told BBC Radio 4’s Today programme: “Boris Johnson, I thought, told us he had an oven-ready deal. And he fought a general election telling us he had an oven-ready deal. [This] now suggests that he was misleading people in that general election.
“And Parliament supported the Withdrawal Agreement earlier on this year. He has made promises and signed a treaty around these arrangements for Northern Ireland, and he now seems to be backing out of that.”
Northern Ireland Deputy First Minister Michelle O’Neill tweeted that any threat of backtracking on the protocol would be a “treacherous betrayal which would inflict irreversible harm on the all-Ireland economy and the Good Friday Agreement”.
Scottish First Minister Nicola Sturgeon said the move would “significantly increase” the likelihood of a no-deal Brexit, and the “resulting damage to the economy will be entirely Tory inflicted. What charlatans”.