Quitting the customs union will leave Britain facing "unavoidable" barriers to trade, Michel Barnier has warned.
After talks in No 10, the European Union's chief Brexit negotiator said the UK must provide more clarity on what it wants in the next stage of the process.
Downing Street has ruled out remaining in a customs union with the EU after Brexit, and David Davis insisted Britain's position is "perfectly clear".
But after a three-course lunch of smoked salmon, pork belly and vanilla custard tart, Mr Barnier told the UK the "time has come to make a choice".
"The conditions are very clear, everyone has to play by the same rules during this transition," he said.
"The certainty about this transition will only come with the ratification of the withdrawal agreement."
He added: "Our future partnership between the UK and EU, on that point we need also clarity about the UK proposals for future partnership."
Mr Barnier said: "The only thing I can say, without a customs union and outside the single market barriers to trade on goods and services are unavoidable. The time has come to make a choice."
Mr Davis said the UK wanted a comprehensive free trade agreement while still having the opportunity to make deals across the rest of the world.
"It's perfectly clear what we want to do. There's no doubt about it, we are leaving the customs union but we are aiming for a good future for Britain."
Confirmation of the Government's approach on the customs union may placate Tory MPs and ministers who are keen for a Brexit arrangement which allows the UK to strike trade deals around the world - something which a customs union could have prevented.
But business leaders have urged the Government to remain in a customs union, and Tory Brexit rebel Anna Soubry urged Number 10 to "do the maths" and listen to company bosses.
She claimed the "hard Brexit" European Research Group (ERG) of Tory MPs, led by Jacob Rees-Mogg, had a "deeply unattractive" plan which involved leaving the customs union "to chase unicorn trade deals" at the expense of existing relations with the EU.
The Brexit Secretary said the talks, which Prime Minister Theresa May dropped in on, had been "very constructive" and the next round would focus on the implementation period.
An "intense" period of negotiations will begin straightaway and the Government is "confident" of securing an agreement at the next meeting of EU leaders in March, he said.
Mrs May's Brexit "war cabinet" is due to meet on Wednesday and Thursday to continue discussions on the "end state" relationship which the UK will seek with its former EU partners.
The PM's official spokesman said: "We have said that we want the customs arrangement to be as frictionless as possible and that's what we will be looking to achieve as part of the deep and special partnership that we are seeking with the EU.
"We want it to be as frictionless as possible and we think we can achieve that because it's in the interests of the UK and the European Union. As with all these matters, it's the beginning of a negotiation."
The spokesman said that Mrs May spoke to Mr Barnier for 20 minutes before his lunch with Mr Davis.
"They discussed the fact that they were pleased that they reached agreement in December. The Prime Minister thanked Michel Barnier for the role he played in that and they agreed it was in the interests of both our sides to move quickly on the implementation period and to agree a positive future relationship."