By Laurence Norman in Brussels and Max Colchester in London 

The U.K. and the European Union were on the brink of a draft Brexit deal Wednesday night, although the British government's doubts about winning Parliament's backing remained an obstacle to an agreement.

EU chief negotiator Michel Barnier briefed ambassadors from member countries on Wednesday evening that the two sides had settled on draft text for all but one significant issue.

That last hurdle -- whether Northern Ireland should be part of the EU's tax regime for goods and services -- prevented U.K. Prime Minister Boris Johnson from giving final approval to the text, according to several European diplomats.

Talks were continuing Wednesday night, but officials said an agreement wouldn't emerge until Thursday morning at the earliest, hours before an EU summit where the bloc's leaders had hoped to approve a Brexit deal. Diplomats said both sides remained concerned that Mr. Johnson's political allies, the Democratic Unionist Party of Northern Ireland, could oppose the deal's terms and prevent the U.K. from sealing the pact.

"I want to believe that an agreement is being finalized and that we will therefore be able to endorse it tomorrow," French President Emmanuel Macron said at a press conference with German Chancellor Angela Merkel.

Ms. Merkel said her confidence had grown that a deal could be struck based on the developments of recent days. "We are in the last meters," she said.

Both sides have been trying to complete a deal this week so that the U.K. could leave on its scheduled departure of Oct. 31. If EU leaders fail to back the deal this week, it is unlikely that the two sides could formally ratify it before the end of the month. That could force Mr. Johnson into an embarrassing retreat, after having vowed to take Britain out of the bloc by the end of the month.

The question of how to prevent a physical border from being rebuilt between Northern Ireland and EU member Ireland has been the toughest issue to resolve since the U.K. referendum decision to leave the EU in 2016. Negotiators have been discussing a plan that keeps Northern Ireland legally inside the U.K.'s customs territory, but that gives it a special status so that businesses can trade freely with the EU.

Some anti-EU lawmakers in Mr. Johnson's Conservative Party would likely base their support for a deal on backing from the DUP, which opposes measures that would leave Northern Ireland outside the U.K. customs area. A deal negotiated by Mr. Johnson's predecessor, Theresa May, failed three times in Parliament in part because of DUP opposition.

Diplomats said the last major sticking point is the value-added tax regime under which Northern Ireland would operate. Under the agreement negotiated by Mrs. May, the province would have been legally in the U.K.'s VAT regime but aligned with many EU VAT rules to avoid the need for a payment point at the border -- a scenario both sides want to avoid.

However, the absence of checks raises the prospect of increased VAT fraud. Northern Irish businesses could in theory evade paying VAT when they import goods from the EU, depriving the bloc of revenue and giving the province's firms a competitive advantage. Tax fraud isn't a new problem: The EU has previously taken the U.K. to court for failing to stop large-scale VAT fraud.

Mr. Johnson tried to build domestic support for the deal on Wednesday, meeting with his cabinet and speaking again with Irish Prime Minister Leo Varadkar. The prime minister told his cabinet that "there was a chance of securing a good deal but we are not there yet," according to a spokesman.

Stephen Barclay, the U.K.'s Brexit minister, said: "What is essential is we reach agreement with the EU," Mr. Barclay said. Then the question is whether that is deliverable within the U.K. Parliament. That is the task on which we are focused."

Mr. Johnson's biggest political worries focus on the DUP, which is supporting his minority Conservative party in Parliament. The DUP has focused on two issues: It has resisted the prospect of Northern Ireland being in a different customs area to the rest of the U.K. and has insisted that Northern Irish parties give their consent to any arrangement concerning the region.

Sammy Wilson, the party's Brexit spokesman, said any changes to Northern Ireland's status would require the support of both unionist and Irish nationalist parties in Northern Ireland's legislature to take effect.

Whether or not there is a deal this week, Britain's Parliament is expected to sit on Oct. 19 for only the fourth Saturday since the outbreak of World War II. European leaders would only formally back an accord if it passes the U.K. and EU parliaments, officials say.

The U.K. Parliament has passed a law requiring the government to ask for a three-month delay to Brexit if there isn't an agreement by Oct. 31, though it isn't clear how this will happen given Mr. Johnson's insistence that the U.K. will leave at the end of October irrespective of whether or not he has a deal.

Should U.K. and EU negotiators reach a draft deal, British lawmakers would begin scrutinizing it on Saturday, with some pro-EU lawmakers maneuvering to make an accord subject to another Brexitreferendum.

An extension beyond Oct. 31 may even be needed if an agreement is secured this month, to write the deal into a treaty and make it legally operational in both the EU and U.K.

--Jason Douglas and Noemie Bisserbe in Paris contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com and Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

October 16, 2019 18:57 ET (22:57 GMT)

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